Retirement means enjoying one's time and freedom without the stress of working daily. However, doing so comes with many financial uncertainties. Increasing inflation gnawing away at the purchasing power of your money is one such uncertainty. The Securities and Exchange Board of India’s (SEBI) guide on Investment Planning for Retirement advocates preparing for ‘inflationary erosion’. You can do so by making the right investment choices which can protect your savings from rising inflation.

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Creating an Inflation-Proof Retirement Corpus

Practically, there are four steps for creating a retirement plan:

1. Determine your financial needs post-retirement, accounting for medical expenses and relocation costs if applicable

2. Calculate the lump sum you’ll receive at retirement

3. Select those asset classes which provide inflation-adjusted returns

4. Start early to benefit from the compounding of returns on your investment

For instance, if you are 30 years old and planning to retire at 60, saving Rs 3,000 a month with an annual return of 10 per cent can potentially yield at least Rs 68 lakh by the time you retire. This way you can grow your savings and protect them from rising inflation.

The Inflation Challenge

Your savings at the time of retirement or your retirement corpus may not be adequate in the long term. For example, a monthly expense of Rs 25,000 today might increase to Rs 1.09 lakh in 30 years at an inflation rate of 5 per cent (taken as an example). Thus your retirement corpus should be able to accommodate such cost escalations and keep up with your standard of living. Investing in inflation-protected investments can potentially help you achieve a retirement corpus which can accommodate such cost escalations.

What Are Inflation-Protected Investments

Inflation-protected investments refer to those assets which provide a hedge against the increase in prices of goods and services over time. Some of the investment avenues that hedge against inflation are:

1. Gold: Gold is an excellent hedge against inflation. Its value tends to increase in line with inflation, thereby sustaining purchasing power. Investing in gold ETFs or sovereign gold bonds provides both liquidity and stability.

2. Equity: Investing in equities generates higher long-term returns and can generally overpower inflation. For instance, a corpus of Rs 1.5 crores can be achieved if a person invests Rs 5,000 per month for a period of 30 years in an equity mutual fund which provides a return of 12 per cent.

3. Floating Rate Bonds: These types of bonds set their interest rates according to the prevalent inflation or market rate, providing consistent returns. They are most suitable for retired investors who wish to have an inflation-indexed income stream with a steady growth pattern.

4. Real Estate Investment Trusts or REITs: REITs allow investors to gain exposure to real estate without the hassle of property management. Returns on REITs often are tied to rental income and can potentially rise with inflation, making them a stable addition to a retirement portfolio.

Building a Retirement Portfolio

Let's take an example of a person, aged 50 years, who has a retirement corpus of Rs 40 lakh. To make his retirement corpus inflation-proof, he can put 20 per cent of his total corpus or Rs 8 lakh into gold, invest 30 per cent or Rs 12 lakh in equity-focused mutual funds to generate growth and allocate 30 per cent or Rs 12 lakh to floating rate bonds to generate regular income in the form of interest. The remaining 20 per cent or Rs 8 lakhs can be invested in REITs for inflation-adjusted returns.  This diversified portfolio can help in balancing risk, provide growth, and create an income source for him to maintain his lifestyle as costs rise.

Inflation rates, market conditions, and personal needs change over time. Conducting a periodical review of your portfolio and rebalancing it can help ensure that it remains in tandem with your goals and risk-taking capacity.