Inflation-Adjusted SIP Planning
Definition
Inflation-adjusted SIP planning accounts for the decrease in purchasing power of money over time. While your SIP corpus may grow to ₹1 Crore in 20 years, the real value of that ₹1 Crore (what it can buy) will be significantly less due to inflation. Planning for inflation ensures your future wealth actually meets your future needs.
In Simple Words
If inflation is 6% per year, something that costs ₹100 today will cost ₹321 in 20 years. So if you need ₹50,000/month today for expenses, you will need ₹1,60,357/month in 20 years for the same lifestyle. Your SIP planning must account for this. The real return on your investment is: Nominal Return - Inflation Rate. If your fund returns 12% and inflation is 6%, your real return is approximately 6%.
Real-Life Scenario
Sanjay plans for retirement in 20 years. Current monthly expense: ₹50,000. Without inflation planning: Target corpus at 12% return: ₹99.9 Lakhs (₹10,000/month SIP) This seems enough... but it is NOT. With 6% inflation planning: Future monthly expense: ₹1,60,357 Corpus needed for 25-year retirement: ₹3.20 Crore Required monthly SIP: ₹32,000/month If Sanjay only planned ₹10,000/month, he would face a retirement shortfall of over ₹2 Crore.
Key Points to Remember
Formula
Future Value with Inflation: Future Cost = Present Cost × (1 + inflation)^years Real Rate of Return: Real Return = [(1 + Nominal Return) / (1 + Inflation)] - 1 Example: Nominal 12%, Inflation 6% Real Return = (1.12 / 1.06) - 1 = 5.66%
Frequently Asked Questions
Test Your Knowledge
1 questions to check your understanding
If nominal return is 12% and inflation is 6%, what is the approximate real return?
Summary Notes
Never plan SIP goals without accounting for inflation
Your actual wealth-building rate is the real return, not nominal
Education and healthcare inflate faster than general prices
Step-up SIP is essential to keep pace with inflation
Review and increase SIP amounts annually to maintain purchasing power