Inflation is falling but it still hurts the retired
A very irate 70-year-old spoke to me sometime back about his bugbear with the inflation stories he was reading in the papers. The inflation numbers had just been announced and the papers had stories about the rising real return on deposits. The stories celebrated the fall of inflation leading to positive real returns. This means that an inflation number of 4% and a deposit rate of 6% gives a ‘real’ return of 2%, as against an inflation number of 8% and deposit rates of 6% giving a negative real return of 2%. People don’t understand that they are better off, said the stories and comments, they just see the lower nominal return and feel poorer even when they are not. “It’s not as if the price of milk or vegetables has come down,” the septuagenarian grumbled. He’s right. The bite of inflation is such that even when inflation numbers go down, it just means that prices are still rising, but not as fast as before. What the commentators forget is that inflation too has a compounding effect. If compound interest on savings makes our money grow faster, the compounding of inflation makes our money buy less and less. For a retired person sitting on a fixed pot of savings and living off its interest, falling rates of inflation also mean falling deposit rates and that means insufficient funds to live on.
Consumer price inflation touched a low of 1.5% last week; just a few years ago, this number was in double digits. As inflation falls, interest rates fall as well. When interest rates fall, it affects us in two ways. We pay lower rates on our borrowing as lending rates fall (these have fallen less than they should, but that is another story), so home loans get cheaper and car loans get cheaper as do personal loans. But the first rate to respond to the central bank’s rate cut announcement are the bank deposit rates as banks rush to reduce what they have to pay rather than what they will collect. If you were getting a 9% return on your retirement kitty of Rs75 lakh that was sufficient for your expenses, at 7% return, what should you do as your income in hand falls from Rs56,000 a month to Rs47,000 a month? “I can’t eat the lower inflation rates, can I?” argued the septuagenarian. You can look at the fixed deposit rates for senior citizens here: bit.ly/2tZZpo7.
Who’s the worst hit? Those not on an inflation-adjusted pension or any source of income that is inflation adjusted, like rentals. What can you do? There are no easy answers to this one. But let’s try. One, do not take undue risk with your money. When the need for income for survival starts to bite, people begin to look for avenues that give more return. Deposits in co-operative banks, corporate deposits, and goofy multi-level marketing schemes such as emu farms or some real estate deal that promises ‘garantee ka return’ with post-dated cheques. Don’t. Just don’t. Two, move from fixed deposits to monthly income plan mutual funds. These are debt funds with about 20-25% equity. These are not risk-free and unless you have a good financial planner or understand the product yourself, don’t invest in them. If the thought of leaving the comfort of the fixed deposit is too frightening, but you do need the income, there are three options in front of you. You won’t like what I will now suggest, but hear me out. Most people have the one house they have built in their lifetime. You are now asset-rich but cash-poor. This means that the house you live in is worth a lot, maybe a couple of crores, but you don’t see that translating into rupees to buy stuff. Option one, sell the house in the city and move to a lower-cost town. Option two, sell the house and move to an old-age home. Several friends’ parents have made the transition and they are mostly happy. But again, do your due diligence really well. Option three is the toughest to do. If you want to maintain your current lifestyle in the house you live with your support system in place, have a chat with the kids. Most people will leave their house for their children to inherit. Write your Will and divide the house according to the income your kids can give today against the house. Suppose the house is worth Rs2 crore and there are two kids. What will a deposit of Rs1 crore give today? That is the contribution of each kid in return for the house they inherit. Sounds terrible. But seriously, if maintaining your current life is important to you, talk to the kids and work it out. Money conversations are very tough. All sorts of family issues come like pishachas (demons) out of the ground when this talk begins. Learn to leave emotion at the door and do the money talk. After all, the kids will get the house, won’t they? I would have recommended a reverse mortgage product but these are still poorly constructed and unfair in India. Do the reverse mortgage in spirit with the kids.
Those planning for retirement, who read this, must see what it feels like to have inflation take giant bites out of your money. Plan ahead to have a part of your money in something that is inflation-friendly. This means that you must have some asset that throws off income that rises over time. For example, rents will typically rise over time and most contracts have an annual escalation clause built into them. Learn about equity and how to invest in it in a structured and systematic manner. Get a skill that will throw off income well into your 70s. Start preparing for your retirement right away. And be empathetic to your parents; you’ll get there in some years.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at firstname.lastname@example.org