Can inflation affect your retirement planning? Ways to stay safe from it

Retirement means stepping away from the cares of one’s career and fulfiling long-held dreams. The word can also denote increased expenses, particularly when it comes to healthcare. It is essential to start planning for retirement early. Even more important is to consider inflation while you are making investments for your post-retirement life. The rise in the value of goods and services, if not taken into account, will mean that you will have insufficient funds to maintain the same standard of living after you step down from your job. Here’s a detailed look at how inflation can affect your retirement planning.

How can inflation impact retirement planning?

Inflation is basically the rise in the value of goods and services over a period of time. Inflation levels will affect medical expenses, food prices and all basic necessities. Keeping inflationary trends in mind while planning retirement is the best thing to do, else it could lead to a debt cycle later in life as a person struggles to fulfil financial needs without a steady source of income. The key to good retirement planning is to take into account all possible expenses, standard of living, financial needs and inflationary trends to get a figure you need to accumulate.

Retirement planning: How can one avoid the effects of inflation?

There are simple steps one can take regarding investment choices to hedge against inflation. This includes diversifying your portfolio and opting for financial plans that give good returns in the long run.

Diversify your investment portfolio: You need to put your money in a mix of debt and equity instruments. This will ensure good returns and help lower the chances of loss due to any single high-risk investment. Putting your savings in equity, fixed income, real estate and cash and gold in the ratio of 30:30:30:10 is considered good by many experts.

Opt for a systematic investment plan (SIP): An SIP can help you kickstart retirement planning easily and ensure you set aside a certain amount every month. The option will give you good returns in the long run. Saving some money every month can help you create a tidy nest egg, which will serve as a hedge against inflation.

Invest in floating rate bond funds: Floating rate funds put money in bonds whose coupon rates are linked to the benchmark interest rate. These funds can help you get more returns in times of high inflation. Central banks raise short-term repo-rates or the rate at which they lend to commercial financial institutions when the inflation is above the predicted figures. Investing in floating-rate funds can generate good income over the short term.

Analyse your investment portfolio at regular intervals: Your retirement planning does not end with creating an investment portfolio. You need to monitor and analyse your investments at regular intervals to check if you are getting the desired returns. If that is not the case, you will have to make changes and go in for financial instruments that offer more.

By following these easy tips, you can avoid the impact of inflation on your retirement funds.