Will you Grow Rich Before You Grow Old / Retire ?
India doesn’t have a Social Security system unlike the developed world and the onus for saving for our retirement is on Individuals. While the govt. has mandated Provident Fund and also created schemes like National Pension Schemes, the contributions to these are minimal.They also return ~ 8% per annum (which just about beats inflation)
You should also be investing in a growth asset like equity to create a significant corpus for your retirement.
Ideally, you should be saving about 10% of your monthly income towards your retirement corpus so that you have a significant chunk 20 to 30 years later.
Let’s say you are 25 years old and earn Rs 30,000 per month.
If you invest Rs 2500 every month in Equity SIPs, your savings after 35 years can grow to about Rs 1.7 crores ( at a 12.5% annual return)
However, your income will increase every year. So if you increase your SIP amount by 5% every year, you can now have Rs 2.5 crores
This is via regular monthly investments in Equity Mutual Funds via SIPs.
You can also invest a lumpsum money as a one time investment.
Let’s say you got a bonus + gift and have Rs 2 lakhs which you don’t need at the moment.
If you invest Rs 1 lakh out of that for your Retirement fund, in 35 years, it can grow to almost Rs 60 lakhs.
Over a period of time, you can accumulate a multi crore corpus due to the growth power of equity and compounding.
Wow, that’s quite a bit of money, you might think !
You may also think such sums are unattainable right now, especially since you are just earning in thousands.
You may also think you don’t need such a large amount of money for retirement.
Well, think again.
- Inflation will cause the value of money to go down and cost of living to go up over a period of time, hence you will need a large corpus.
- The power of compounding and regular disciplined investing can help you build that large corpus.
However, compounding works only if you give it enough time.
In the above example, if the 25 year old person waits for 10 years and starts investing for retirement at 35, they will only have about Rs 90 lakhs (instead of 3 crores compared to the person who started 10 years earlier.)