Future retirement income refers to the income you expect when you retire. Based on your retirement plan, it can come from at least three sources: employer pension plan, personal retirement savings plan and personal pension plan. The aggregate amount from these sources would constitute your future retirement income. But the value of this amount would be definitely lower by the time you retire because of inflation rate.
Inflation rate is the annual rate of change or the year-on-year change in the Consumer Price Index. The National Statistical Coordination Board (NSCB) estimated the 2009 core inflation rate of the Philippines at 4.1%. Assuming that inflation rate will occur in the future years (which is least likely), then your expected retirement income will decline in value by 4.1%.
Take the case of my late father in-law. When he retired as professor of a state university, the lump-sum amount he got upon retirement substantially eroded in real value. His retirement coincide with the assassination of Benigno "Ninoy" Aquino was in 1982 and the Philippines severely suffered from an economic crisis - drought and general increase in prices.
His planned projects with the lump-sum money he got did not materialize. Thereafter, his monthly pension also dropped in real value. It was barely enough to support his medication and hospitalization bills.
My late father-in-law was a voracious reader and a good writer as well. If the internet was already popular then maybe he could have made use of his talent in creating a website and establish an online business. On the other hand, it could be difficult for him since he did not know about computers. Luckily, for us today, we can take advantage of the internet as an economic activity when we retire.
Well, my father-in-law's case is an example of the effect of inflation on retirement income. Furthermore, he was solely dependent on his retirement from GSIS. It's fortunate that his children were able to support him
How do we cushion the effects of inflation then?
1. Accept that it is a reality and project what's the likely rate when you retire. Discount your estimated future retirement income by that rate which is already factored-in in the retirement calculator.
2. Invest on assets which will not depreciate, but instead appreciate in value such as real estate.
3. Find additional sources of income which you can engage in even when you are already retired. Personally, I am biased to website building as an additional source of future retirement income.