Monthly SIP
One of the key financial goals is retirement planning which involves regular savings and smart investment opportunities. This is the good news because once you start earlier, it will be more easier to build a substantial corpus with all compounding effects. Without a problem, a Systematic Investment Plan (SIP) initiated at 25 years old can be achievable for any person of ₹8 crore retirement commencing at 60.
In this post, let us discuss what compounding is and why SIP works well as a wealth creation tool & How much you need to invest every month for your retirement corpus of ₹8 crores. We are going to illustrate with a few examples and also write down all the calculations.
Power of Compounding
Albert Einstein described compounding as the “eighth wonder of the world” since it can turn modest regular investments into a decent sum to tide you through your retirement Compounding, in essence is actually earning a return not only on your principal investment but also the returns generated by that investment.
Applicable to mutual fund SIPs, where the interest or returns you earn will be reinvested in order to further generate return on top of your existing investment. Over time, this creates a snowball effect and your wealth grows exponentially (especially when you stay invested for the long term).
What is SIP (Systematic Investment Plan)?
A Systematic Investment Plan (SIP) is a way to invest in mutual funds regularly. You do not invest a lumpsum but make equal monthly contributions in the mutual funds that you are choosing. It is a great option for salaried employees who prefer to invest slowly in place of lumpsum.
Benefits of SIPs include:
Systematic investment: Relating to the point of investing regularly, this is basically Rupee cost averaging because then you get out in equal amounts at better times.
Power of compounding: Remaining invested for a longer duration makes your money grow due to the powerful phenomenon called compounding.
Affordability — You can easily get it unless you start by making spare changes each week.
Goal: ₹ 8 Cr accumulated by Age 60
Let’s say you are 25 years old and plan to retire at the age of 60. That is the time horizon you have of 35 years to accumulate a corpus of ₹8 crore. Calculations follow at a few different rates of return.
Assumptions:
Target Corpus: ₹8 crore
Investment Tenure: 35 years
Mode of Investment: SIP (Per Month)
Annual Return 12%, 10%, 8% (for different scenarios).
Inflation Adjustment: Assumes constant sales and expenses over time, which means that inflation is irrelevant (idea stolen from this free financial planning worksheet)
The formula for SIP Calculation:
The formula used to calculate the required SIP amount to achieve the target corpus is based on the future value of annuities:
FV=P×r(1+r)n−1×(1+r)
Where:
- FV = Future Value or target corpus (₹8 crore)
- P = SIP amount
- r = monthly rate of return (annual rate divided by 12)
- n = total number of months (investment period in years × 12)
Let’s now calculate the SIP amount required for different rates of return.
SIP Calculations Based on Different Rates of Return
1. If You Earn a 12% Annual Return
- Annual return (r) = 12% or 0.12
- Monthly return (r/12) = 0.01
Total investment period (n) = 35 years × 12 = 420 months.
2. If You Earn a 10% Annual Return
- Annual return (r) = 10% or 0.10
- Monthly return (r/12) = 0.0083
- Total investment period (n) = 35 years × 12 = 420 months
The required monthly SIP amount comes to ₹14,000.
Thus, to accumulate ₹8 crore with a 10% return, you would need to invest ₹14,000 every month for 35 years.
3. If You Earn an 8% Annual Return
- Annual return (r) = 8% or 0.08
- Monthly return (r/12) = 0.00667
- Total investment period (n) = 35 years × 12 = 420 months
The required monthly SIP amount would be ₹22,600.
So, with an 8% return, you need to invest ₹22,600 per month for 35 years to reach the target of ₹8 crore.
Why Start Early?
The biggest benefit of starting your investment journey when you are 25 remains the additional time window for investments which expands up to 35 years. The key is that by remaining invested you give compounding a long time horizon to do its work.
For example, ₹9,200 a month at 12% returns can come up to an amount of more than ₹8 crore by the time you are 60. However, with even a 5 years or 10-year delay in starting an investment (take it from the age of around… whatever man!!…) it would require you to invest many-fold amount SIPs on monthly basis if u want to reach that target.
For example, if you start investing at 30 instead of 25:
- To reach ₹8 crore in 30 years (instead of 35), your required monthly SIP at 12% will rise from ₹9,200 to around ₹16,500.
- Similarly, starting at 35 means you only have 25 years to invest, and your monthly SIP amount will increase even further to ₹30,500.
This clearly demonstrates how crucial an early start is for building a large corpus comfortably.
Other Factors to Consider
Inflation: Though, we have not accounted for the inflation in this calculation, do remember that ₹ 8 crore will be of lesser value after 35 years from now. So, a good thing to do would be that base your retirement goal factoring future inflation (you may target some larger corpus then) in order not to see degeneration of purchasing power.
Step-up SIPs: This is especially for those who can periodically increase their contributions as and when there is a hike in salary so that wealth accumulates at an even quicker pace. Step-up SIPs have the provision to increase your monthly allocation by a fixed percentage every year.
Consistency and Patience: consistency is the key to a successful retirement plan this consistency surely be possible only If we invest ( not speculate or gamble) over a long period. The market will always have its share of ups and downs but it is very important to stay invested if you want the power of compounding to work for your benefit.
Conclusion
For the same amount, starting a SIP as young as 25 kind of works to accumulate ₹8 crore at age 60. You will have to invest ₹ 8,800 every month for 35 years if you expect a return of say12% per annum. This amount jumps to ₹14,000 at a 10% lower return and all the way up to ₹22,600 for an 8 %return.
The power of compounding encourages the virtues of crying only once and regularly, so start early on SIP – systematically investing money without your wallet whimpering too much. Make the right plans, start early and live a stress-free retirement financially after all you work to retire.
