You may be surprised but it is true that if you use two of the investing principles to your advantage you can create a reasonable retirement corpus. The two principles are:
1.Pay yourself first: This means taking out a fixed sum every month from your income and invest before you even start spending. Let us say that you pay yourself 30% of the paycheck or monthly income and manage your monthly budget with the remaining 70%. It is doable and highly recommended.
2.Save early and Invest regularly: This principle sounds very simple but one needs a great degree of discipline to follow it. Let’s say you start earning at age 23 and go on investing for next 7 years before you hit 30.
Let us illustrate this with an example.
In the first case Rohan earn 50,000/month and starts saving Rs 15,000 each month and invest in an equity mutual fund for next seven years. He then stops investing in to this pot and leaves it to grow at 15% compounded annual growth rate (CAGR) in equity mutual fund for next 30 years up to his retirement.
At age 60 Rohan would have a retirement corpus of Rs 14.2 crore.
In the second case Mahesh also earns 50,000/month but does not get to know about the investing as part of financial planning until he is 35. He starts investing 20,000/month into an equity mutual fund and continues for next 25 years till he is reaches age 60. His funds also grow at 15% CAGR throughout his 25 years of investing.
At age 60 Mahesh’s final retirement corpus is Rs 5.5 crore.
Even though Rohan saved and invested only Rs 15,000/month for just 7 years (Rs 12,60,000) in his 20s his corpus at retirement is more than double that of Mahesh who started investing late but with higher amount Rs 20,000/month for next 25 yrs till retirement (Rs 60,00,000).
Another way to look at this is that even though Mahesh invested about 5 times more money as his own contribution than Rohan but he got a corpus at retirement which is only 40% that of Rohan.
The most amazing part of this is that if you invest just about 1% and rest 99% comes from compounding as in case of Rohan but Mahesh had to contribute 10% due to a late start.
Saving and investing in your 20s can secure retirement corpus which is the biggest life goal for a great life even after retirement. By the way the employees provident fund will never be enough to support retirement. Therefore, everyone needs to create their own retirement corpus and what better way than to save and invest in the 20s!