One common mistake investors make is assuming that the value of their retirement savings will remain constant over time. For instance, if you plan to retire with a corpus of Rs 5 crore, it’s important to remember that the purchasing power of that amount will not remain the same over the next 25 or 30 years due to inflation.

Inflation causes your expenses to increase over time because prices for goods and services rise, which reduces the value of your money. For example, if inflation is 6%, something that costs Rs 100 today will cost Rs 106 next year. Therefore, it’s crucial to invest your money in a way that your returns comfortably outpace inflation in the long run.

From the moment you start a job, you focus on saving and building a substantial corpus for retirement. Many of you aim for early retirement, which requires more aggressive saving strategies, especially if the retirement goal needs to be achieved in fewer years. For example, if you start working at age 25 and aim to retire with Rs 5 crore by age 50, you have 25 years to reach your goal. Similarly, if you plan to work until age 60, you have 35 years to accumulate the same amount. The person with the shorter time frame needs to invest more each year to reach the Rs 5 crore goal.

Impact of inflation on your retirement savings

In this story, we will examine how inflation impacts the value of a Rs 5 crore corpus over time. Specifically, we will look at two scenarios:

One person who starts working at age 25 and retires at age 50, and the value of their Rs 5 crore corpus after 25 years.

Another person who starts working at age 25 and retires at age 60, and the value of their Rs 5 crore corpus after 35 years.

We will assume an inflation rate of 6% for both periods to illustrate how inflation erodes the value of money over these times. This analysis will help demonstrate the diminishing purchasing power of money as inflation progresses.

Scenario 1: Value of Rs 5 crore after 25 years

With an inflation rate of 6% per year, the value of Rs 5 crore today will be much lower in 25 years. To put it simply, after 25 years, Rs 5 crore will have the purchasing power equivalent to about Rs 1.17 crore today. This is because inflation reduces the value of money over time.

Scenario 2: Value of Rs 5 crore after 35 years

Similarly, if you hold Rs 5 crore for 35 years with a 6% inflation rate, its value will decrease even further. After 35 years, Rs 5 crore will be worth approximately Rs 51.62 lakh in today’s terms. This substantial reduction reflects how inflation erodes the value of money over a longer period.

In essence, the longer you wait, the more inflation will reduce the real value of your money.