Retirement planning

Planning for inflation: why the same income buys less every year

A retirement plan that ignores inflation is not optimistic. It is measuring the wrong thing.

Inflation is easy to nod along to and hard to feel. Over a working life it is a background irritation, offset by pay rises. Over a thirty-year retirement, in which no salary rises to meet it, it is usually the single largest force acting on the plan.

The arithmetic, stated plainly

At 6% a year, prices double roughly every twelve years. Put the other way round, a fixed ₹1,00,000 a month buys this much, in today’s terms, as retirement goes on:

Someone who fixes their income at retirement and lives thirty years ends up on roughly a sixth of the lifestyle they started with. Nothing went wrong with the investments. The income simply stopped keeping up.

Which is why the withdrawal has to rise

The practical consequence is that a sustainable plan withdraws more in cash terms every year in order to withdraw the same amount in real terms. That is why the SWP Calculator has a withdrawal-growth input at all, and why setting it near your inflation assumption is the setting that keeps a plan honest.

The cost of doing this is substantial, and worth seeing rather than being told. Take ₹1 crore, a ₹50,000 monthly withdrawal and an 8% return:

Nominal money and real money

Two different questions get confused constantly:

• Nominal: how many rupees or dollars will actually be in the account in that future year. This is what a statement will show.
• Real: what that amount would buy at today’s prices. This is what determines how you actually live.

A projection showing ₹3 crore left after 25 years is describing nominal money. At 6% inflation, ₹3 crore in 25 years buys roughly what ₹70 lakh buys today. Both statements are true; only the second one tells you how comfortable you will be. The SWP Calculator’s year-by-year table can be switched between the two views for exactly this reason: the underlying projection does not change, only the lens.

Choosing an inflation number

There is no correct value, but there are defensible ones. Long-run consumer inflation in India has generally run in the region of 5–7%; in the US, UK and much of Europe the long-run figure has been closer to 2–3%. Two adjustments are worth making on top of whichever baseline you use:

• Your basket is not the national basket. Headline inflation is an average across a whole economy. If a large share of your spending is healthcare, education or domestic help, your personal rate is likely to be higher than the published one.
• Test the number rather than trusting it. Run your plan at your baseline and again two percentage points higher. If the plan only works at the lower figure, it is not a plan. It is a forecast.

How RetirePeace applies inflation

• The FIRE Calculator uses it to grow today’s annual expenses into what the same lifestyle would cost in your retirement year, before applying your multiple.
• The Retirement Calculator uses it twice: to grow your desired income to the retirement year, and again to raise that income every year of drawdown.
• The SWP and 2-Bucket calculators use your withdrawal-growth input to escalate the income, and your inflation input to discount future balances back into today’s money for the real-terms view.

All four apply it as a single, constant annual rate. Real inflation is neither constant nor smooth, and a long plan will contain years well above and well below whatever you enter. A constant rate is the standard simplification for long-horizon planning; it is not a claim about any particular year.

This guide is educational and general. It is not financial, investment, tax or legal advice, and it takes no account of your circumstances. Every figure quoted is an illustration produced by the arithmetic described, not a forecast or a guarantee. Investment returns, inflation and market conditions are uncertain and will differ from any assumption used here. See the full disclaimer.