Why You Must Not Follow CPI Inflation When Adjusting The Cost Of Living For Your Retirement?

The average consumer price index (CPI) inflation remained at around 5.5 per cent from 2014 to 2024. This means that if your monthly expense requirement was Rs 50,000 in 2014, then, considering 5.5 per cent inflation, your current spending requirement should range around Rs 86,000 per month. But does this assessment match your actual current monthly expenses? CPI shows the inflation based on a fixed basket of goods and services, whereas your spending requirements may evolve with time; therefore, it may not move in sync with the prevailing inflation level. For example, inflation in tourism is considered in the CPI, but it may not factor in all the components related to tourism that match your comfort and preferences. So, CPI may give you a broader idea about the change in the cost of living, but it may not be precise. So, what should you do to make up the difference in the CPI and the exact inflation level?

Identify Your Key Expenses For Retirement

What would be your key expenses after your retirement? Apart from your regular expenses, you should list crucial non-frequent expenses such as buying a car, travelling, and recreation. Also, make a separate list of your essential expenses, such as insurance premiums, rent, electricity bills, etc. Instead of using the CPI inflation rate, you may apply a higher rate on essential items, such as considering the return on the RBI floating rate bond (currently 8.05 per cent), to assess your fund requirement in your retirement.

Maintain A Bigger Contingency Fund

The requirement of a contingency fund doesn’t end with your retirement, but it becomes even more crucial than before. Despite having a retirement corpus in hand to meet most of the financial goals, you should maintain an adequate contingency fund to meet financial emergencies as well as to mitigate the inflation risk. If there is a mismatch in your estimation of the inflation rate and the actual inflation rate, then you can meet the excess fund requirement using a portion of your contingency fund.

Try To Create A Bigger Retirement Corpus Than The Exact Requirement

Having a little extra financial cushion after retirement can help you easily meet the deficit in corpus due to inflation. So, instead of targeting an exact retirement corpus, you can focus on a slightly higher corpus size.

Your fight against inflation doesn’t end even if you have a significant corpus for your retirement; you must keep a close watch on the prevailing inflation rate after you retire and make essential adjustments in your spending and investments so that your corpus doesn’t fall short of your retirement goals.

The author is an Independent Financial Journalist

(Disclaimer: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)