Is your delay in starting investments for retirement, derailing your quality of life post retirement? Or can you make up for a late start by investing more?
Consider, you are 30 years old today. You have another 30 years of work life left to invest for your retirement. In addition, you will have to plan and accumulate wealth for your kid’s education, marriage, some overseas travels with the family and a home purchase. The list does sount daunting, and retirement is ofcourse the last and hence the least priority when you are 30 years old.
In most cases, the decision would be to put off planning for retirement by a few years. In most cases, retirement planning would start when you reach 40, a full 10 years later. The justification will be that your income would have atleast doubled by then allowing you to save more per month for retirement. But have you considered this problem mathematically?
Lets say Mr. Naetik and you are 30 years old today. He starts investing INR 1,00,000 every year for his retirement in a equity mutual fund that returns 12% per annum for 15 years. Once he is 45 years old, he will stop his investments.
| Year | Investment in year | Investment in year + Past year fund | Total at end of year |
|---|---|---|---|
| Year 30 | 1,00,000 | 1,00,000 | 1,12,000 |
| Year 31 | 1,00,000 | 2,12,000 | 237,440 |
| Year 32 | 1,00,000 | 3,37,440 | 377,933 |
| Year 33 | 1,00,000 | 4,77,933 | 535,285 |
| Year 34 | 1,00,000 | 6,35,285 | 711,519 |
| Year 35 | 1,00,000 | 8,11,519 | 908,901 |
| Year 36 | 1,00,000 | 10,08,901 | 1,129,969 |
| Year 37 | 1,00,000 | 12,29,969 | 1,377,566 |
| Year 38 | 1,00,000 | 14,77,566 | 1,654,874 |
| Year 39 | 1,00,000 | 17,54,874 | 1,965,458 |
| Year 40 | 1,00,000 | 20,65,458 | 2,313,313 |
| Year 41 | 1,00,000 | 24,13,313 | 2,702,911 |
| Year 42 | 1,00,000 | 28,02,911 | 3,139,260 |
| Year 43 | 1,00,000 | 32,39,260 | 3,627,971 |
| Year 44 | 1,00,000 | 37,27,971 | 4,175,328 |
| Year 45 | 0 | 41,75,328 | 4,676,367 |
| Year 46 | 0 | 46,76,367 | 5,237,531 |
| Year 47 | 0 | 52,37,531 | 5,866,035 |
| Year 48 | 0 | 58,66,035 | 6,569,960 |
| Year 49 | 0 | 65,69,960 | 7,358,355 |
| Year 50 | 0 | 73,58,355 | 8,241,357 |
| Year 51 | 0 | 82,41,357 | 9,230,320 |
| Year 52 | 0 | 92,30,320 | 10,337,958 |
| Year 53 | 0 | 1,03,37,958 | 11,578,513 |
| Year 54 | 0 | 1,15,78,513 | 12,967,935 |
| Year 55 | 0 | 1,29,67,935 | 14,524,087 |
| Year 56 | 0 | 1,45,24,087 | 16,266,978 |
| Year 57 | 0 | 1,62,66,978 | 18,219,015 |
| Year 58 | 0 | 1,82,19,015 | 20,405,297 |
| Year 59 | 0 | 2,04,05,297 | 22,853,933 |
| Year 60 | 0 | 2,28,53,933 |
You, on the other hand, will wait 10 years and start your investments when you are 40. Since, your income is more, you will invest 2x, that is INR 2,00,000 per month for 15 years, until you are 55 years old.
But, both of you will need the funds when you turn 60. So, Mr. Naetik’s funds would have grown for 15 years after he stopped his investments. But your funds would have grown for 5 years after you stopped your investments. Still you invested twice what Mr. Naetik invested. Surely, that should count for something and you must have the bigger corpus. Right?
| Year | Investment in year | Investment in year + Past year fund | Total at end of year |
|---|---|---|---|
| Year 30 | 0 | 0 | 0 |
| Year 31 | 0 | 0 | 0 |
| Year 32 | 0 | 0 | 0 |
| Year 33 | 0 | 0 | 0 |
| Year 34 | 0 | 0 | 0 |
| Year 35 | 0 | 0 | 0 |
| Year 36 | 0 | 0 | 0 |
| Year 37 | 0 | 0 | 0 |
| Year 38 | 0 | 0 | 0 |
| Year 39 | 0 | 0 | 0 |
| Year 40 | 2,00,000 | 2,00,000 | 224,000 |
| Year 41 | 2,00,000 | 424,000 | 474,880 |
| Year 42 | 2,00,000 | 674,880 | 755,866 |
| Year 43 | 2,00,000 | 955,866 | 1,070,569 |
| Year 44 | 2,00,000 | 1,270,569 | 1,423,038 |
| Year 45 | 2,00,000 | 1,623,038 | 1,817,802 |
| Year 46 | 2,00,000 | 2,017,802 | 2,259,939 |
| Year 47 | 2,00,000 | 2,459,939 | 2,755,131 |
| Year 48 | 2,00,000 | 2,955,131 | 3,309,747 |
| Year 49 | 2,00,000 | 3,509,747 | 3,930,917 |
| Year 50 | 2,00,000 | 4,130,917 | 4,626,627 |
| Year 51 | 2,00,000 | 4,826,627 | 5,405,822 |
| Year 52 | 2,00,000 | 5,605,822 | 6,278,520 |
| Year 53 | 2,00,000 | 6,478,520 | 7,255,943 |
| Year 54 | 2,00,000 | 7,455,943 | 8,350,656 |
| Year 55 | 0 | 8,350,656 | 9,352,735 |
| Year 56 | 0 | 9,352,735 | 10,475,063 |
| Year 57 | 0 | 10,475,063 | 11,732,071 |
| Year 58 | 0 | 11,732,071 | 13,139,919 |
| Year 59 | 0 | 13,139,919 | 14,716,709 |
| Year 60 | 0 |
So, by the time you both turn 60, Mr. Naetik will have a corpus of INR 2.28 crores after having invested a total of INR 15 Lakhs. While you will end up with INR 1.47 crores after having invested a total of INR 30 Lakhs.
As seen from the tables above, the power of compounding along with the longer duration of investment gives Mr. Naetik almost 55% higher corpus than yours, in spite of investing 50% less. And we are not even considering the effects of better returns due to staying invested for longer.