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Illustration: Binay Sinha
Planning for retirement is crucial, and the dream of having a comfortable post-work life often includes a substantial nest egg. A new analysis by FundsIndia reveals the significant impact of starting early when it comes to reaching your retirement goals.
The analysis highlights the power of compound interest and how it can work wonders for your finances over a long investment horizon. Here’s the key takeaway: the younger you start investing, the less you need to set aside each month to reach your retirement target.
Reaching Rs 10 Crore by 60: A Breakdown
The analysis focuses on achieving a retirement corpus of Rs 10 crore by the age of 60. Assuming a consistent 12% annual return on investments, the analysis reveals the following:
Start Early, Invest Less:
If you start investing via SIP at the age of 25, the monthly SIP required is only Rs 15,000.
Here, the key is the extended investment horizon (35 years – starting at 25 and reaching 60). Even a relatively smaller monthly investment has more time to grow exponentially due to compounding.
But if you delay and start at the age of 30 the monthly SIP required is 2 times more at Rs 28,000!
If you delay and start at the age of 40 the monthly SIP required is 6 times more at Rs 1,00,000!
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Source: FundsIndia Research. Assuming CAGR at 12%
The Magic of Compounding
The significant difference in monthly SIP amounts highlights the power of compounding. When you invest early, your money has more time to grow not just on the initial investment but also on the accumulated returns from previous years. This snowball effect helps you reach your target corpus with a lower monthly investment compared to starting later.
The math behind it
Imagine you invest Rs. 15,000 every month for 35 years (age 25 to 60) with a 12% annual return. The total amount you invest (contributions) would be Rs. 15,000 * 12 months/year * 35 years = Rs. 6.3 crore.
However, due to compounding (earning returns on your returns), the total corpus accumulated by age 60 could be significantly higher, potentially reaching Rs. 10 crore (or more) due to the snowball effect.
While the analysis uses a 12% annual return assumption, it’s important to remember that actual returns may vary. Diversification and a well-defined investment strategy are crucial for managing risk and achieving your financial goals.
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The 8-4-3 rule in the context of compounding is a simplified concept. It’s used to illustrate the potential acceleration of growth in your investments over time due to compounding. Here’s how it breaks down:
8 Years of Initial Growth: This suggests that in the first eight years of your investment, your corpus might experience steady but relatively slower growth.
4 Years of Accelerated Growth: Following the initial eight years, the rule proposes that your investment might experience a period of more rapid growth, potentially doubling in value within the next four years.
3 Years of Continued Doubling: The final part of the rule suggests that your investment might experience another doubling within the following three years.
Important Points to Consider:
Remember:
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This is a simplified example, and actual returns may vary. -
Factor in inflation, which could erode the purchasing power of your future corpus. -
Consider seeking professional financial advice for a personalized investment plan.
First Published: Jul 12 2024 | 11:05 AM IST
