6% or 8%? What is the right inflation rate for retirement, children's education?

If your target corpus is the current cost of the goal, it would be hardly enough to take care of the financial goal after, say, 15 or 20 years.

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Many mutual fund investors do not include inflation while calculating the target corpus for their long-term financial goals like retirement, children's education, and so on. This is extremely risky because if your target corpus is the current cost of the goal, it would be hardly enough to take care of the financial goal after, say, 15 or 20 years.

For example, if you need Rs 6 lakh to take care of your living expense now, you would need Rs 14.37 lakh to maintain the same lifestyle after 15 years. This is assuming that the inflation rate is 6 per cent per year. Now, the moot question. Would random single-digit number would be enough to calculate various long-term financial goals like retirement, education corpus, medical corpus, among others.

“You have to use different inflation number for your different goals as the costs across expenses like higher education, medical costs, and cost of buying a car and so on are not rising in the same fashion. The inflation rate varies for all these expenses, “says Dilshad Billimoria, CFP, Dilzer Consultants, a Bengaluru-based wealth management firm.


“If you are saving for your child’s higher education, the inflation rate will be different for higher studies within the country or studying abroad. If you are aiming to send your child abroad, you will need to factor in currency depreciation as well. Within country, if you are planning to send your child to an IIT or IIM or Delhi University or some fancy private university, should decide the inflation rate,” says MS Shabbir, Founder and Managing Director of SenSage Financial Services, a Hyderabad-based wealth management firm. “For higher studies, you can consider anywhere between 10 and 20 per cent depending on your where you wish to head,” he adds.

For retirement, mutual funds advisors ask their clients to take around 8 per cent inflation rate for calculating the target corpus. “Normally, we take inflation rate of 6 to 7 per cent but taking one per cent extra margin can help to meet the goal comfortably and in time,” says Billimoria.

Most mutual fund advisors ask investors to be extra cautious while doing the maths for a corpus for medical cost. They say the medical expenses are shooting up very quickly as compared to other costs. They say most individuals do not account for rising medical expenses which can very easily sweep away your money saved for other goals.
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“Most medical insurance policies do not cover the expenses post discharge from a hospital. Even if it does, there will be a limit. It is very important for every individual to account for rising medical costs if they want to meet their other financial goals in time. We can assume rate of 15 to 20 per cent for medical expenses,” says Shabbir. “Long term care is another big problem in our country. Surveys tell you that its cost is growing at a faster rate of 30 per cent every year,” he adds.

Long term care refers to a condition where patients, irrespective of the age, are bed ridden or suffers ailments like dementia or stroke, and need a permanent care for a long time period.

For other goals investors can check the inflation rate in the sector. For an instance, if you are looking to buy a car after three years, you should factor in at least 10 per cent inflation. Again, the inflation rate will depend on which car segment you are aiming at.

Mutual fund advisors advise investors to revisit the inflation numbers every three to five years.
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“Inflation rates are not steady. You should revisit the assumed inflation rates once in three to five years and take needed action in your portfolio so that it does not lag behind in helping you achieve your financial goals,” says Billimoria.
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