Quora Answer: How Do You Plan for Retirement in an Inflationary Economy?

The following is my answer to a Quora question: “How do you plan for retirement in an inflationary economy?”

Inflation is the sustained increase in the cost of goods and services over a period of time.  In that sense, every healthy economy is an inflationary economy since the economy is growing, and that growing economy is also the cause of inflation.

What you should do is project your annual inflation of your entire investment period, and put your funds in assets that earn at least that amount.  For example, when doing retirement planning for my clients where I am, I project an annual inflation of around 2%, which is reasonable.  I, then, allocate their assets to funds that have an overall projected growth of between 4.5 to 5.5% over that period, for example.  For the more conservative clients, it could be a 40% weightage to debt instruments, and 60% to equity.

This ensures that the funds always make more than the inflation rate so that there is real growth in their investments.  If inflation is more than this 2%, there are serious underlying issues affecting the economy, and that means moving funds elsewhere.