Monday, March 30, 2015

Impact of Inflation on Long Term Fixed Deposits

The biggest mistake that a senior citizen can make

 Assuming a person retires at 60 years of age & lives till 85 years (normal life expectancy has gone up to 80-85 years); value of his original Rs.1 crore in FDs is only RS.23.30 lacs after 25 years (adjusted for inflation @6% p.a.). Which means that even during his/her lifetime; value of investment has eroded in purchasing power & also the investor is leaving behind a fraction of the original investment behind for his/her family. Like currently, post rate cut (& prospective rate cuts in future) Bank FDs will be generating lower & lower returns to the investors & hence has reinvestment risk attached to it.
Also, if these investments are supposed to pass onto the beneficiary (either wife or kids) post the death of the investor, he/she is leaving behind corpus of a much lower value (inflation adjusted)

If senior citizens wish to invest their retirement corpus, they should invest in such strategized equity schemes (v/s FDs); opt for SWP of a reasonable amount (say not more than 8-10% p.a. Otherwise they may start dipping into their principal investments) every year & create tax efficient cash flow with the possibility of long term wealth creation - both for themselves as well as for their beneficiaries
• More importantly, after beating inflation & creating wealth, senior citizens can enjoy their lives with more funds in their hands during their lifetime

Starting to save at the age of 35 instead of 50 can mean retiring with four times the wealth.
If one has time to learn just one thing about investing, then it should be this.

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