End of Service Gratuity - Cash in now or wait ?

badrol

Hi again.

During my retirement planning, I came across the following idea. The problem is that I dunno if my logic is flawed, so if you think it is, please advise.

1. I work in a country where inflation is typically 10-12% pa
2. My salary is on the top of its scale, and the only increase I get is 15% every 2 years.
3. For simplicity, I assume that this amounts to 7.5% per year (I know this is not exaclty this, but lets keep things simple)
4. On the day I retire, I will get one month of pay for every completed year with the organisation, as a lump sum.
5. Our financial officer has offered to release the gratuity earlier if we wanted.

So here is my logic:

1. Every year that I work, I get a 7.5% increase, which is negated by the 10% inflation.

2. At the end of my career, I will get something that looks like a big sum (in 2023 terms), but which amounts to much less in 2008 terms, because of inflation.

3. If I take out the gratuity say every year and use it to buy say european managed funds to prepare for retirement (at around 8% pa), it wont do much to get back the 2.5% that I already lose every year (7.5% increase - 10% inflation) BUT it will counteract the cummulative negative effect that I would get if I took the money when I leave.

Does this make sense ?

Thanks