Investing Fundamentals

Starting early versus starting big

If you want to be sure about achieving your financial goals, start early. Don’t be deterred even if the start is small. It’s far more important to start early than to start big. If you have time on your side, you have a secret sauce that can turn even small amounts into gigantic sums over time. It’s called COMPOUNDING

By Indranil Guha


I was recently chatting up with two of my ex-colleagues, who finally woke up to the fact that they haven’t really started saving up for their golden years in any meaningful way and hence wanted my two cents on how they should start. One of them is about to turn 38. Let’s call him Mr. 38 and the other one Mr. 28.

When you start saving up for your golden years, the first step is to assess how much do you need in current prices to get by in a month. In this assessment, you should exclude outgo towards your EMIs of your home loan, car loan and likes because you would have most probably repaid these loans and won’t have these liabilities by the time you retire. In case you live in a rented house or apartment, and intend to continue living in rented accommodation even after you retire, you should factor your rent in your monthly expenses.

How much do you need to retire?

In case of Mr. 38, turns out he needs about Rs.95,000 to last him an entire month. Of this, the lion’s share was his home loan EMI of Rs. 45,000 per month. So excluding his home loan EMI, he needs Rs. 50,000 in current prices to get by in a month. Now this monthly expense of Rs.50,000 is not going to remain the same forever. It’ll go up in line with inflation. Assuming inflation to be 6% going forward and that he retires at an age of 60 (that’s 22 years from now), Mr. 38 would need a staggering Rs. 1,80,177 per month by the time he retires to get by an entire month. That’s the kind of money Mr. 38 would need every month by the time he retires in order to afford a standard of living that Rs. 50,000 per month affords him today.

How can you save up so much?

Now if these numbers sound too daunting to achieve, don’t be deterred. The key to be able to afford a post-retirement standard of living that’s at least at par with your present standard of living is to save systematically and invest your savings in instruments whose post-tax returns are likely to beat inflation by a significant margin over the long term. And the instrument that arguably best fits this bill, at least for retail investors, is Equity Mutual Fund. Over the long term, you can expect them to generate returns of about 13% annually.

The Financial Plan

I quickly did the math – assuming Mr. 38 has a life expectancy of 80 years, the plan that would work best for him is as follows:

  • He would have to invest Rs. 26,681 every month between now and his retirement (at 60) in a few good equity mutual funds.
  • This plan will get him to a retirement corpus of Rs. 3.57 crores by the time he turns 60 (assuming his investments generate a return of 13% annually)
  • Since he would need a stable income post retirement, he should invest this corpus of Rs. 3.57 crores in a bank fixed deposit (yielding an interest of 8%) once he turns 60.

This financial plan will afford him the following after he retires:

  • 38 will be able to draw Rs. 1,80,177 per month from the age of 61 onwards (that’s today’s equivalent of Rs. 50,000 per month)
  • Not just that, this corpus will allow him to increase his monthly withdrawals by 6% every year (in other words, his standard of living will be protected from inflation of up to 6% even after his retirement)
  • This corpus will be sufficient to last Mr. 38 till he turns 80

The Power of Starting Early

By the way, remember there was another character in this story – Mr. 28. By this time, he was a very worried man. I tried to enquire as to what was bothering him, to which he confided that if one needs to set aside and invest as much as Rs. 26,681 every month to be able to afford a comfortable retirement, he may as well not even try, because with his present salary, there was no way that he was going to be able to find Rs. Rs. 26,681 in a month to invest. But guess what – he doesn’t need to set aside so much to achieve the same financial goal. He is a full 10 years younger than Mr. 38, and the monthly investment that he needs to start with in order to achieve the same financial goal as Mr. 38 (to be able to afford an income of today’s equivalent of Rs. 50,000 per month post retirement) is guess how much – just Rs. Rs. 13,387.

The Secret Sauce – Compounding

Wonder how’s that possible? The secret sauce which makes this possible is called Compounding. Compounding basically means investing back the returns generated by an investment such that the return generated is added back to the principal and then the investment generates further returns on the enhanced principal. This is a very powerful concept and can over time turn even small sums into very large sums of money. Mr. 28’s initial investments will compound for 32 years by the time he retires at 60, while Mr. 38’s initial investments get to compound only 22 times by the time he turns 60. This is what enables Mr. 28 to start with a monthly investment that’s half of what Mr. 38 needs to start with in order to achieve the same financial goal.

Moral of the Story

Moral of the story – start your investment journey as early as you can. The impact of starting early (or starting late for that matter) can be quite staggering. The chart below illustrates the monthly investment that you need to start with at various ages in order to achieve the financial goal Mr. 28 and Mr. 38 have set for themselves i.e.  to be able to afford an income of today’s equivalent of Rs. 50,000 per month post retirement.

AgeMonthly investment required
22 YrsRs. 9,025
25 YrsRs. 10,981
30 YrsRs. 15,300
35 YrsRs. 21,541
40 YrsRs. 30,946
45 YrsRs. 46,313
50 YrsRs. 75,938
55 YrsRs. 1,61,295
Monthly investment required to be able to afford a post-retirement monthly income of today’s equivalent of Rs. 50,000 per month

As you can see, the monthly contribution you need to start with grows exponentially with age. Quite clearly, the implications of delaying the start of your investment journey are quite staggering. By now, Mr. 28 was a far more relieved man. Both men however were kicking themselves as to why they didn’t start earlier.

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Indranil Guha

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