Why Inflation Hurts the Aged Maximum
There is a convincing reason for the aged to work even after retirement from work in certain countries especially if their retirement benefits are not large enough and inflation is more than the optimum level. Inflation at best captures average price of a predetermined basket of goods. Individuals, however, have different preferences for goods. Even if inflation is kept at the optimum level, it might affect certain people unfavorably if their preferences for goods are on the wrong side. For example, if a retiree just makes both the ends, an increase on house rent of $20 per month, will force the retiree to cut his consumption of preferred goods or to find alternative residence. In both the cases, the retiree forgoes satisfaction by reducing usual consumption considering the logistic cost involved in shifting the residence. On the aggregate level, it is negative for the economy. As inequality in many advanced and developing countries widens more and more in recent times, a favorable social benefit policy is imperative. This also calls for attention to early financial planning before retirement, failing which a person's retirement life will be in jeopardy. Financial education is in the interest of the State rather than its citizens.
The best social benefit that a central bank and a government can provide to people is controlling inflation and keeping it at an optimum level. The following data best depicts the financial pressure due to inflation that is higher than optimum level.
Suppose, your monthly expenditure is $5000 at present cost. If you are retiring after 24 years, then what will be your monthly income requirement? It depends upon where you are living, and who your central bank is.
- If your central bank is keeping the inflation at 2%, then your monthly requirement will be $8040, after 24 years.
- AT 3% inflation, it will be $10145, after 24 years.
- At 4% inflation, it will be $12795, after 24 years.
- AT 5% inflation, it will be $16120, after 24 years.
- AT 6% inflation, it will be $20240, after 24 years.
- @7% your monthly requirement will be $25385.
- @8% your monthly requirement will be $31665.
- @9% your monthly requirement will be $39500.
- @10% your monthly requirement will be $49270.
If you have any specific goal such as buying a home at your retirement, then you will have to look for inflation index of home. If you can buy a home for $100,000 today it will cost you $1 million after 24 years at 10% inflation. It is impossible for a person who just makes both the ends. Everyone needs surplus income and the surplus income has to be invested intelligently.