# Inflation- why we are not that worried.

Inflation and our assumption of inflation at 6% has become one of the major topics of discussion in the comments on our posts. Like we have said before looking at inflation in isolation is wrong and anyone who is worried that inflation since 1991 has been 8% should also realize that NIFTY returns for that period have been 11.7%.

Both of these figures are average and being average they do not present a complete picture of either the stock market or general expenses. However we can’t go around predicting and projecting yearly inflation or returns which means that these are the figures we have. So let’s go ahead and do some calculations both at our previously mentioned figures and new figures from historical averages.

Below is a quick excel for someone who will retire with 2.5cr in 10 years and currently spends 6Lac a year.

 starting sum 2,50,00,000.00 starting sum 2,50,00,000.00 inflation 6% inflation 8% return 8% return 12% starting expense 6,00,000.00 starting expense 6,00,000.00 age stash expense age stash expense 32 6,00,000.00 32 6,00,000.00 33 6,36,000.00 33 6,48,000.00 34 6,74,160.00 34 6,99,840.00 35 7,14,609.60 35 7,55,827.20 36 7,57,486.18 36 8,16,293.38 37 8,02,935.35 37 8,81,596.85 38 8,51,111.47 38 9,52,124.59 39 9,02,178.16 39 10,28,294.56 40 9,56,308.84 40 11,10,558.13 41 2,50,00,000.00 10,13,687.38 41 2,50,00,000.00 11,99,402.78 42 2,59,05,217.63 10,74,508.62 42 2,65,85,267.10 12,95,355.00 43 2,68,17,165.74 11,38,979.14 43 2,82,48,831.82 13,98,983.40 44 2,77,32,441.53 12,07,317.88 44 2,99,91,280.68 15,10,902.07 45 2,86,47,133.54 12,79,756.96 45 3,18,12,582.91 16,31,774.24 46 2,95,56,766.71 13,56,542.37 46 3,37,11,963.29 17,62,316.17 47 3,04,56,242.28 14,37,934.92 47 3,56,87,755.83 19,03,301.47 48 3,13,39,771.96 15,24,211.01 48 3,77,37,235.52 20,55,565.59 49 3,22,00,805.82 16,15,663.67 49 3,98,56,425.32 22,20,010.83 50 3,30,31,953.52 17,12,603.49 50 4,20,39,874.98 23,97,611.70 51 3,38,24,898.03 18,15,359.70 51 4,42,80,408.08 25,89,420.64 52 3,45,70,301.40 19,24,281.28 52 4,65,68,832.98 27,96,574.29 53 3,52,57,701.73 20,39,738.16 53 4,88,93,612.96 30,20,300.23 54 3,58,75,400.65 21,62,122.45 54 5,12,40,490.32 32,61,924.25 55 3,64,10,340.46 22,91,849.80 55 5,35,92,058.30 35,22,878.19 56 3,68,47,969.91 24,29,360.78 56 5,59,27,274.19 38,04,708.44 57 3,71,72,097.86 25,75,122.43 57 5,82,20,905.94 41,09,085.12 58 3,73,64,733.46 27,29,629.78 58 6,04,42,903.85 44,37,811.93 59 3,74,05,911.98 28,93,407.56 59 6,25,57,687.68 47,92,836.88 60 3,72,73,504.77 30,67,012.02 60 6,45,23,338.34 51,76,263.83 61 3,69,43,012.17 32,51,032.74 61 6,62,90,682.23 55,90,364.94 62 3,63,87,337.78 34,46,094.70 62 6,78,02,254.41 60,37,594.13 63 3,55,76,542.52 36,52,860.39 63 6,89,91,125.53 65,20,601.66 64 3,44,77,576.71 38,72,032.01 64 6,97,79,575.16 70,42,249.80 65 3,30,53,988.28 41,04,353.93 65 7,00,77,592.43 76,05,629.78 66 3,12,65,605.09 43,50,615.17 66 6,97,81,182.28 82,14,080.16 67 2,90,68,189.12 46,11,652.08 67 6,87,70,453.07 88,71,206.58 68 2,64,13,060.01 48,88,351.20 68 6,69,07,458.33 95,80,903.10 69 2,32,46,685.52 51,81,652.27 69 6,40,33,762.19 1,03,47,375.35 70 1,95,10,235.90 54,92,551.41 70 5,99,67,694.10 1,11,75,165.38 71 1,51,39,099.25 58,22,104.49 71 5,45,01,254.58 1,20,69,178.61 72 1,00,62,354.34 61,71,430.76 72 4,73,96,628.86 1,30,34,712.90 73 42,02,197.47 65,41,716.61 73 3,83,82,260.13 1,40,77,489.93 74 -25,26,680.67 69,34,219.60 74 2,71,48,428.31 1,52,03,689.12 75 -1,02,17,772.30 73,50,272.78 75 1,33,42,273.67 1,64,19,984.25 76 -1,89,73,488.69 77,91,289.15 76 –34,37,802.72 1,77,33,582.99 77 -2,89,05,960.06 82,58,766.50 77 -2,36,48,437.85 1,91,52,269.63 78 -4,01,37,904.68 87,54,292.49 78 -4,78,08,390.26 2,06,84,451.20 79 -5,28,03,572.94 92,79,550.04 79 -7,65,06,503.91 2,23,39,207.30 80 -6,70,49,772.81 98,36,323.04 80 -11,04,10,659.43 2,41,26,343.89

In The first scenario where returns are merely 8% and inflation is on the lower side at 6% the said household will run out of money by 73.

In the second scenario with 11.7% returns and 8% inflation they will run out of money at 76. In grand scheme of things if you are going to run out of money it does not matter if you are out of money a year earlier.

If they add another 50L to their stash their money will suffice for another 10 years at least on either calculation.

What does that mean?

On the surface someone would think this means that the corpus is way less that the actual requirement. Well there are a few safety nets in place.

1. PF/pension realisation. We would benefit from EPF post 60 years and it would contribute a decent sum in our 60s which might skew the balance by quite a bit.
2. Reduction in expenses– We expect a reduction in our expenses as we grow older and definitely when we leave the work life. We would no longer be living in one of the most expensive places in the country and we would have more time to actually insource both eating and other small maintenance. If we have a kid in recent years we would definitely be out of kid related expenses by the time we are 60. I am definitely not supporting a ~30 year old.
3. Earning while out from active job. Our field allows us a huge amount of flexibility and possibility for side hustles and with our specializations we would fare quite well being advisors with limited responsibilities and a decent chunk of money even a 5-10K per month income can change the way expenses pan out and allow us to live a better life. This might be true for most of us.
4. Actually trying to reduce costs- We have a lot of fat in our budget for many reasons. We also have a lot more things we can do actively to reduce our expenses and keep them well below our desired amount of 14K. We slip up every now and then but I expect us to last better and achieve more once we have the time and are not facing daily time crunches of going to office and making things happen.

Talking about inflation might be an easy way to say ‘you don’t know what you are talking about’. Well neither do you because things affecting your money 10 years later haven’t happened yet. What it does mean is that both of us would be in similar scenarios a year here or there. I would just be a bit more conservative in my returns and might be withdrawing less money.

We have learnt to take these projections with a pinch of salt just like our expenses. We hope to keep our day to day expenses below 14K but we know there will be months where we will exceed that way too much be it to buy a new phone or to finally buy some clothes. Healthcare is also an expense we have learnt to take in our stride and as we get closer to our target year we hope to have a much better understanding of what our 40 year selves would require in terms of medical care. For big things we will trust health insurance to come through.

## The Healthcare Inflation

There is currently no way for us to know what health problems we will face when we are 70/80or 90. We can also safeguard against the rising medical costs to a certain extent. Will it cost 10cr for assisted living per year? Or will India by then be a single payer healthcare system. These are questions we do not wish to be scared by today.

It might sound short sighted but the reality is most of us will need some help as we grow old. There will also be people far older, sicker and poorer than us at every step of the way. Almost all of us will find a way to get through the illness; difference might be the location and type of care both of which are quite important.

There is a chance that we might not suffer from long stretched illnesses which drive our networth into ground and leave us at the mercy of others. If this is in our future and we keep on working years on years to safeguard ourselves against a disaster decades in future we might be left with quite a few regrets.

## The Education Inflation

We are currently DINK but that might change in future and we understand that education is a huge investment and costs have skyrocketed in past decade or so. However, we also believe that there are ways to reduce the expense as well as take education in your own hands. Though the time we have to worry about our little one’s first education is at least 3-4 years away we are currently not averse to home schooling once one or both of us retire. That would allow us to divert the money to other endeavours the kid might be interested in and also to travel.

## Travel Inflation

Our budget to most might look like we have cut it too short and would not be able to make room for any travels. We have been travelling extensively for last five years and there has been one trip which has crossed 1Lac for both of us in all that time. If we could travel slower, not worry about days off we would definitely bring the cost way down. We also have a lot of time to figure out how much taking a child along would impact the expenses and how we can cut them further.

When we started we were on a shoestring budget and it is only in past few years that we have finally let the purse strings a bit loose. We currently target to keep our travels under 10% of our CTC. This expense also includes any trips to visit family or a shorter weekend getaway. With two international trips and multiple family trips we are well below our budget.

There is no end to whatifs in life. We might both die tomorrow or go on to live healthy fulfilling lives for decades to come. Most people will call us stupid if we leave our jobs to enjoy whatever life we have left; in case we die tomorrow or maybe next year. There is a perverse fun in giving into your fears, it makes us feel smarter, rational and someone who can think clearly. We have succumbed to those fears and it is similar fear which makes us question what we are doing and aiming for every few days.

There is a definite possibility that you will die bed ridden in a a subpar care center because inflation ate all of your purchasing power. there is however an equal chance that you will live a comfortable life with enough to support you during and at the end of your existence. We would like to believe in the second scenario because life is just too long to be lived shrouded in fear.

## 16 thoughts on “Inflation- why we are not that worried.”

1. One thing that I know is that I am a lot more conservative than you are! Numbers do not lie. But they do not give the complete picture too. I am pretty sure we will face recession both before and after retirement. What happens if market falls for a couple of years but expenses remain constant? There will be multiple other scenarios some beneficial and some harmful.

Where we differ is in our margin of safety. I would need a lot more margin before I am comfortable that I am covered for life’s uncertainties. But this is a personal choice and not justifiable purely based on numbers. For someone aggressive this might seem foolish while for me an aggressive plan would be ill-advised.

What this all comes down to is – it is not about the numbers. It is about mindset and lifestyle. We need our personal options to tide over those periods when life puts us down. We should be comfortable that these options give reasonable assurance that our corpus will last our lifetime.

PS: The fear I have given in to is not having the corpus last long enough. The first thing I did for this is to use a higher inflation and lower return to simulate life’s unpredictability. The second is to work a couple of years extra. Both give me a higher margin of safety.

Inflation is something which we are currently trying to get our heads around as well and discussions on this site have helped us a lot. When we started I looked around and there were people who said taking inflation less than returns is not right in ‘Indian conditions’.
I am looking forward to a recession or slump in the market atleast. If it does happen in next 10 years we expect to work hard and put more money to work in the market. When we started saving last year we were lucky to have a low market with Brexit which has resulted in over 25% returns in a year. We are today better educated on how we can get best bang for our buck and I hope we will be able to capitalize on the recession and wait out the post retirement recession.

I agree it is not only about numbers and we are far aggressive than most. For us the light at the end of tunnel is not just early retirement it is an improved life without worries of what if one or both of us loose the job.
As I have previously written we are not really sure what retirement strategy we will opt for. Maybe a stepped approach or maybe we will both walk out together or maybe we will both want to work more at that point of time.

2. Great post! Inflation is one thing which is poorly understood and could play a huge role in FIRE. However, as you correctly pointed out, as inflation rises, so do market returns. Also I think it is just unrealistic to assume a constant 8% or 6% inflation for the next 50 years. There would be years where it might be greater and some where it might be negligible. As far as my plan goes, I haven’t really thought of how much corpus I would need before I call it quits. I also will have a good amount of sum waiting for me as I turn 60 from my 401k fund. But like Financial Squirrel said above, I would not mind working a few extra years to ensure that I have enough. I wouldn’t mind side hustles either and in fact I might engage in those willingly as I wouldn’t know what to do with myself when I am on FIRE.

Thanks Raman,
I would not say we understand inflation at all, we just realize it will happen and we can only control what effects it has on us to a certain degree. We would also receive a considerable sum when we turn 60 and hope if we have been naughty with our spending it will make up for a bit of it.
Unfortunately since the events have not happened already we can’t base anything on varying numbers but assuming a base number allows us to project as well as play with spreadsheets.
Side hustles are definitely something we count on mainly because our profession allows for it and because we love making some money if we can choose when and how.

3. DB says:

Rather than inflation assumptions in isolation – it’s important to look at assumptions on real return – i.e. portfolio returns – inflation %.

Low inflation goes hand in hand with reduced interest rates. Given most portfolios have a debt component – this reduces the total returns from the portfolio. Also – the more the Indian economy develops and inflation reduces – so does the long term return from equities.

As long as one does not assume real returns more than 1-2%, it doesn’t matter if inflation is assumed at 6% or 8%. IMO it would be reckless to assume inflation at 6% but NIFTY/stock market returns at 11.7%. I personally am taking 1% rate of real return in my assumptions.

I agree. We assume 2% real return since we calculate at 6% inflation and 8% return.

4. Sakthi says:

Hi,
I recently came across your blog and I am in similar age group as you are (86 born) and have similiar goals as yours.
I believe the biggest advantage in your case is you being the lady in the relationship and understanding the finances.
FIRE journey I believe is as much an emotional journey as a financial journey and it requires enormous trust on the model..
Indian wives mostly are conservative(which actually saves most families from financial ruin) and its difficult to get a buy in from the for a unconventional goal like FIRE.
From your goal perspective I believe health insurance premiums will become a significant part of expenses in another 10-20 years as health care inflation in india is growing at 15 %..
It will be prudent to take into account, those expenses in later years (after 40-45)

Thanks for taking time out for our blog and goals. I have recently become increasingly aware about the difference in financial control and approach between Indian spouses. We have always clearly communicated and debated various financial options and decisions which helps us from a lot of unintentional bias.
I believe it is a weird disconnect between expectations on various fronts. While my male colleagues would love their wives to be more prudent and work with them to ‘their’ goals; most would not like if she earns more or has the final say in anything.Equality is something our generation is still working out and I hope the next one would have a better grasp.

5. Sakthi says:

Ignore my previous comment regarding healthcare part as I notice you have covered it in one of your earlier posts.

6. Rajarshi Mukherjee says:

I do have similar goals. We have 2 kids and I plan to retire with 1.2 cr( I know its very ambitious and may be jumping on FIRE ! :).Plan to retire in the next 3-4 years max ! However I have a strong feeling this is about mindset rather than numbers. As long as both husband and wife is employable and is ready to take up work in case if there’s an emergency, one can retire at a much earlier age than what the numbers provide. BTW , I love going through this website

P.S : Its ONE life and nothing can be more valuable than time, a non-renewable resource available to a person & Lot of people say early retirement by 45 , I have seen people in IT dying by 45. So my two cents on this – Keep some time in your locker as well , not only your money….

1. royallyfrugal@gmail.com says:

It is definitely about the mental game than the actual money matters. We are yet to decide on our actual strategy to get out of the system. We might both go part time, or one of us might work a bit longer or we might both quit the same day. We have been a bit too busy to keep updating but it’s nice to know you are reading through.

7. SM says:

Hi,
I just came across your blog, and I think its very good. Keep it up.
When you do long term portfolio planing, with certain inflation and portfolio growth estimates, keep in mind that using averages for very long terms can be dangerous. It is better to use estimates for 7-8 year time frames, and vary these with certain assumptions. Also, the long term impact of reduced portfolio growth is far more than the impact of inflation on expenses.
For example, if you take the 7 years from 2007 to 2013, inflation averaged about 9.5%, the BSE Sensex had a CAGR of about 6% (13,000 in Jan 2007 to 20,000 in Dec 2013); the NHB Residex for Mumbai had a CAGR of 12% (100 in 2007 to 222 in 2013) and Bank FD rates averaged about 8%.
So if you had planned for 8% inflation and 12% portfolio growth, you would have ended up spending about 5% more than your planned expenditure over the 7 years.
In the next 4 years from 2013 to 2017, inflation came down to 5% and the Sensex gave a CAGR of 14%. However to reach your target of 12%, the Sensex has to give a CAGR of 17-18% over 2018-2021. If it does not give this return, the long term impact on your portfolio will be substantial.
I have come across some early retirement sites, mainly by young Americans, and while I wish them well, I do not know how sustainable their models and assumptions are. Most of them have been managing their portfolios for the last 10-12 years, and frankly this has been a bit of a Goldilocks period.
So a good thumb rule for retirement planning in India is: Have a portfolio (debt plus equity plus real estate) that is at least 35 times your annual expenses; have about 1/3 of your expenses met by an alternate asset class like real estate rentals, and use a debt/equity bucket strategy for drawing down on your debt/equity portfolio.
Good luck.

1. royallyfrugal@gmail.com says:

Thanks for the well wishes. We are acutely aware of all the things we cannot foresee which is why we closely follow our spending patterns rater than the daily ups and downs of the market or the scare of inflation. Real estate is something that we have been looking at but neither one of us are quite comfortable in adding another property to the mix. However if REITs finally show up in the country we are all set to give those a spin.
We are yet to zero in on our withdrawal strategy but we hope to do that few years down the line with even more spending data available.

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