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How Inflation Erodes Savings over the Years?

November 08, 2016
Living long is everyone's dream but outliving your finances can turn it into a nightmare. Spiraling cost of basic amenities is a constant threat to retirement savings. Better known as inflation, it is the single largest menace that gnaws away any form of savings.

Because inflation is like a silent operator working in the background, most individuals never notice its eroding effects on their finances, until it's too late.

Inflation has a dual impact on the investor's hard-earned savings. It not only erodes the current purchasing power of money it also magnifies the monetary requirements for the future.

Therefore the all-important question for the investor is - will his savings withstand the eroding effect of inflation?

Take an investor setting aside Rs 10,000 every month in a savings plan that fetches 10% return. Over 30 years, his corpus will grow to Rs 2,26,04,879, which in his view is a reasonable sum to meet his financial needs at that time.

This is of course the amount he will save, untouched by inflation.

Once you consider inflation - say 5%, then over a 30-Yr period, the sum will halved to Rs 1,13,02,440.

The 10% rate of return on the investment appears reasonable at first, until you factor in 5% inflation. This is the real rate of return - which is what matters at the end of the day.

One way to counter the eroding effects of inflation is by investing a significant portion of savings in equities - like a unit-linked plan (ULIP), particularly at a younger age when the investor has the appetite for risk.

The point to remember at all times is to earn a return good enough to go one up on inflation.

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