“Retirement is when you stop living at work and start working at living” – I came across this quote sometime back and felt like writing a few lines about retirement, it’s pros and cons and impact basis ever increasing rate of Inflation. Going by the meaning as per dictionary, income that is not spent is saving. Say, if you don’t spend 20% of your income every month and just keep the cash in your cupboard, then you are saving money – No question about that. One of the most surprising things that most of us discovered during demonetisation was that a lot of simple-minded people actually saved money like this. I am surely not going to discuss how big a fiasco the idea of demonetisation was or for that matter, how much merit the idea actually carried. But practically speaking, there were many tales of homemakers having stashed away lakhs of rupees out of household expenses. Sitting on cash is a simple concept but by itself, it does a lot of damage to your wealth. The basic reason for that is your money doesn’t retain its value. Prices rise and what was worth a hundred rupees last year is probably worth five or ten or even twenty rupees more this year. Inflation eats away your savings, bit by bit. We all know this, but even so, we fail to incorporate this knowledge into our savings and investment decisions. As a matter of fact, we all fail to take this into account when we put away money in supposedly safe deposits etc for long periods of time. We are aware that a lot of people understand compound interest, but most do not appreciate the decompounding effect of inflation on their money. What compound interest gives, inflation takes away. To put it across in simpler terms – inflation is effectively the reverse, it’s like decompound interest.
The term “inflation” is derived from the Latin term inflare, meaning to “blow up or inflate”. It means a continued rise in prices while the value of money declines. Inflation decreases the value of money, making goods more expensive to buy. It influences the interest rate we get on our savings and the rate we pay on our mortgages. It also affects the level of pensions and benefits that you get. Inflation has been adversely affecting commoners and elderly people since it decreases the value of their savings. Since each year’s inflation occurs on top of the previous year’s inflation, it means that the effect is just like that of compound interest. Consider a situation where you invest INR 1lakh of your money in a deposit which earns you perhaps 7% a year. At the same time, if prices are also generally rising at the rate of 7% a year. In such a situation, your compounding returns will just about keep pace with the inflation. The actual amount will increase, but what you can do with it, won’t. So, for example, over ten years your INR 1lakh will become INR 2.16lakh (approx). However, at the same time, on an average the things you could buy for INR 1lakh will also cost INR 2.16 lakh. In effect, you have not become any richer. The purchasing power of your INR 1lakh is still INR 1lakh. We all remember what things used to cost in the past – how someone earning INR 10K a month was comfortably middle class 20 odd years ago. However, it’s very hard to believe such estimations or predictions into the future. If you are forty now, then when you retire, a barely comfortable middle-class existence will need a monthly expenditure of INR 2.5 lakh. And that’s when your retirement begins. By the time you are 80 years old, you could need to spend INR 10lakh a month. Please don’t take it as a hyperbole – this is going to happen. People think in nominal terms and the future impact of inflation is awfully hard to internalise. Becoming a low-inflation economy can be the real solution to this menace but since that’s clearly not on the agenda, savers ought to adjust for inflation.
Historically, we have held the notion, that “It’s survival of the fittest” but I believe in the current day scenario, “It’s the flexible, who flourish in this world”. To put it in perspective – we as common people either have a fixed mindset or a growth mindset. People with a fixed mindset believe that everyone has a certain fixed level of capabilities, competence, intelligence, work skills, etc and their mindset then begins to optimize what they have and show themselves as smart as possible and make the best of it. People with growth mindset, on the contrary, believe in fluidity and flexibility. They believe that everybody’s knowledge base, skills, intelligence and habits can be developed with conscious effort. So their mindset tells them that they can get smarter if they want to. If you can understand the difference between the two mindsets, you would know that the latter obviously then opens themselves up for growth, vis-a-vis the former, who are trying to do their best with whatever they believe they have. Think carefully about this –People who are relying on deposit-type savings which yield very little real rates of return, need to either save a lot more or else take the equity route, in order to avoid old age hardships and enjoy their pension in the golden years of their life.
On a lighter side, every consumer dreams of deflation, but it is practically impossible and as such it is advisable to invest in Inflation, as it seems to be the only thing going up consistently.
(Ifthikar Bashir is a freelance Financial Advisor)
cgc.srinagar@gmail.com