Warning: Inflation for retirees may be higher than CPI

The inflation rate for retired individuals may be significantly higher than the official Consumer Price Index (CPI), posing a risk of rapidly exhausting their lifelong savings. According to a report by The Economic Times, while price hikes are a pressure for working families, they are more severe for retirees as they lack a salary and every incremental expense must be met from their principal capital, which never returns.

For instance, in the case of 61-year-old retired teacher Shankar Kulkarni from Hubli, it was observed that the increase in prices of curd and milk has led to a significant rise in his monthly expenses. Along with the price hikes at Nandini Dairy before Diwali, prices of LPG, petrol, diesel, and groceries have also increased. In many households, grocery bills have risen by 35 to 40% and vegetable bills by nearly 50%.

The primary reason behind this price hike is the disruption in shipping via the Strait of Hormuz in late February, caused by the US-Israel-Iran war. As a result, prices of India's crude basket rose from approximately $69 per barrel to $113-114. This impact has reached the kitchen. Domestic LPG cylinder prices were increased by ₹60 on 7 March and by ₹29 on 7 June. Pump prices increased four times within two weeks after 15 May.

According to official statistics, retail inflation was 3.48% in April, which rose to 5.54% in September, while food inflation has reached 7.74%. SBI Research expects CPI inflation to exceed 6.5% in October and November. However, while the CPI includes items like cheap mobile data and electronics, retirees purchase essential items such as milk, curd, vegetables, pulses, oil, gas, and medicines, the prices of which are rising most rapidly.

In Shankar Kulkarni's case, the prices of his monthly essential items have increased by 28.2% since February. While the official CPI shows 5.54%, his kitchen expenses are five times higher. This increase amounts to an additional ₹5,128 per month, or approximately ₹61,500 per year. If calculated on a safe withdrawal rate of 4%, an additional capital of approximately ₹15.4 lakh is required to sustain this expense for life.

The estimated inflation rate for retirees could be 9%, which is much higher than official figures. Most retirees keep their money in Fixed Deposits (FD). A Senior Citizen FD offering 7.5% interest in the 30% tax bracket yields 5.25% after tax. Against a 5.54% CPI, this return is already negative, and if personal inflation is 9%, it results in -3.44% per year. This means the capital is not growing, but gradually depleting.

If an individual retires with a capital of ₹1 crore and withdraws ₹68,000 monthly, and if the capital grows at 6% after tax while inflation also remains at 6%, the amount lasts until the age of 85. However, if inflation remains at 9%, the amount is exhausted by the age of 75 instead of 77 in just three years. If 9% inflation becomes the norm, the amount is exhausted by the age of 74, causing the individual to spend the last few years of their life without income.

The report states that while keeping money in Fixed Deposits makes the amount appear to grow, its purchasing power decreases. Inflation punishes lenders and rewards owners, as interest rates in FDs are fixed while market prices continue to rise. Therefore, investing in equity could be an option.