Fooled by half truths ?
I was recently going thru a video on retirement planning, from an extremely well-respected news channel.

One of the experts on the show said that if you are 25 and were to save just 10,000 per month and invest in Mutual Fund SIP till the age of 60, assuming a return of 12% per annum, this would result in a retirement kitty of about 5.5 Crore. The expert goes on to say that even if you were to withdraw 5 lacs rupees every month from this kitty after retirement till the age of 80, emphasizing 5 lac per month and not year, you will still have 10 Cr at the age of 80, assuming 12% p.a. return on investment.

At the end of that, the moderator had a sigh of relief, most probably implying that even a small saving can give you tremendous value at retirement.

All these numbers are absolutely fine, except that the expert did not talk about the purchasing power of such numbers in a distant future. He did not mention how inflation erodes the value of money.

Assuming an inflation rate of 5%, 5 lacs per month after 35 years from today (that is when the 25 year old will retire at 60) corresponds to about 85 thousand today. The value of 5 lacs will fall to about 35,000 by the time the person is 80. If one wants to have a constant purchasing power during this period then that amount would be around 65,000 per month.

The 10 Crore left at the age of 80 will be equivalent to about 68 lacs today.

Though the presented numbers are correct but they do not represent purchasing power, which is what the end user is really concerned about. Shouldn’t advisors and prominent channels be more circumspect in presenting such half-truths?

Let me have your thoughts!