Most of my finance related numbers for retirement were based on an inflation of 6% and investment returns of 10%. Going by the recent data, neither inflation nor returns are inline with my expectations. We are in a high inflation and low returns period of a market cycle. The worst part is that the returns from both equity and debt are low at the same time. While it is not as bad in India, elsewhere in the world, that is causing a lot of pain. Since the rest of the world will affect India at some point, I thought it was time to revisit my numbers and see if they still make sense in the future as I continue my long retirement journey.
First let me tackle the case of inflation. While inflation in US, Europe and most parts of the world has been pretty high, India has somehow been resilient. I don’t know all the reasons for the inflation. Some economists say it is because of excessive money printing in the developed world. Some say it is because of the Russia-Ukraine war. While others say it was because the advanced countries were too late to acknowledge inflation and did not take action quickly like hiking interest rates to tackle inflation. Whatever be the reasons, those economies are suffering. In India, while inflation is higher than usual, going by the numbers, it is not as bad. Anyway, we are used to higher inflation generally.
The world economic data from IMF (International Monetary Fund) puts the inflation number at around 6.89% in India thus far in 2022. I have calculated my retirement numbers based on a 6% inflation. Should I be worried? Not really. Let me explain. I assumed a 6% inflation based on my personal inflation I have seen before retiring in 2018. Everyone’s inflation will be different from the inflation that is published on the internet. Because we could be consuming goods that inflate slower or faster than the basket of expenses that the government uses to calculate inflation. So our personal inflation could be higher or lower than that number.
The inflation from 2011 until 2018 (the year when I retired), as per IMF data is 6.78% which is higher than what I used for my calculations. The inflation as per IMF from 2018 to 2022 is 5.35% which is less than my calculations. But none of that matters to me because my actual inflation is closer to 6% in the last 5 years as it was before retirement.
Moreover, I can adjust my expenses to reduce the effect of inflation, for example, by postponing some expenses like upgrading my TV or car. So I am not excessively worried about inflation. I assumed a large enough expenses per year to cover everything I need at a basic level, plus some extravagance. I can drop the extravagant expenses in a pinch to compensate for some level of inflation. Since current inflation of 7% is not too far from 6%, it is fine as of now.
The thing that I have no control over are the returns of my investments. At the time of retirement, the average returns of Nifty 50 were about 11.5% over a 20 year period. I just went with that number for my equity returns expectation. As for debt, I expected a return that was a little bit higher than anticipated inflation number. RBI was trying to keep inflation at around 4%, so I hoped for 6.5% returns. The expectation is a little bit on the higher side but I went with it anyway.
Since I was planning to have a 70% allocation to equity mutual funds and 30% in debt mutual funds, the overall return should be 70% x 11.5% + 30% x 6.5% = 10%. Based on an inflation of 6% and return of investment of 10% I made a projection of how my corpus will grow over time during retirement. So what is the reality as of now? It has been almost 5 years since I became financially independent and my overall returns since then are around 9.87%, a bit lower than my expectations but not by much. So again, just like the inflation number, this is also nothing that is a cause for concern as of now.
However, if you look at the short term returns, they don’t look so good in debt mutual funds and FDs because of low interest rate regime for a long time due to COVID. Likewise, equity returns were a little less since start of this year. But if you expand the horizon a bit, things are alright. While I expect the ultra short term debt mutual funds to give better returns in the near future, I don’t have such a nice view of equity. But that is how things are. Eventually they should revert to mean.
Anyway, as of now, I am not planning to make any changes to my calculations or projections. I still expect my returns to be around 10% and inflation to be around 6%. Note that I don’t follow the 70:30 asset allocation, but I do expect the returns to be close to that. My asset allocation changes based on various parameters, but it is not designed to give superior returns. It is designed to reduce volatility. That is all for today!