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|
|starting expense||6,00,000.00||starting expense||6,00,000.00|
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.
- 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.
- 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.
- 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.
- 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.
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.