Inflation is one of the most important factors to consider in retirement planning. It erodes the purchasing power of your retirement savings, and thus needs to be taken into account in your planning. Here you need to determine how much your retirement income would be, adjusted for inflation.

In our example, we know that the current value of James’ retirement income is RM120, 000 (from Step 2), and he has 24 years before he retires (from Step 1). The average inflation rate in Malaysia (from 1990 to 2001) is 3.3% - see chart below. Let us assume that the average inflation rate over the next 24 years will be 5% per annum.

Source: Department of Statistics

A retirement income of RM120, 000 today at an average inflation rate of 5% would require James to have an inflation-adjusted income of RM387, 011 per annum in 24 years time. This can be calculated as:

Note: We will complete this article next month with Part 2 which will teach you how to calculate the total funds you need for your retirement and how much you therefore need to save per year.