With inflation in mind, it becomes critical to build up a sizable retirement fund. Many people think that building a retirement fund worth Rs 5 crore requires a major investment or a very high salary. That isn't always the case, though.
By following two fundamental principles, i.e. investing frequently and increasing investments as income grows, even someone making Rs 50,000 a month may earn a corpus of Rs 5 crore.
But it may take more than thirty years to accumulate a sizable corpus if a person does not gradually increase their investment amount.
Suppose a person earning Rs 50,000 per month invests 30% of their salary through a Systematic Investment Plan (SIP) with an expected return of 12%, then the investment period needed to reach Rs 5 crore is around 31 years.
At 12% annual return:
Monthly SIP: Rs 15,000
Investment period: 31 years
Total invested amount: Rs 55.80 lakh
Estimated return: Rs 4.63 crore
Estimated retirement corpus: Rs 5.19 crore
But if the same person increases the SIP amount by 8% every year, the target can be achieved much earlier.
So, if a person earning Rs 50,000 per month starts a SIP of Rs 15,000 and increases the investment amount by 8% every year with an expected return of 12% per year, then they can build a retirement corpus of Rs 5.57 crore in 26 years.
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For example, in the first year, the monthly SIP will be Rs 15,000. In the second year, after an 8% increase, it becomes around Rs 16,200. In the third year, it rises to about Rs 17,496 and so on.
Starting SIP: Rs 15,000
Annual step-up: 8%
Expected annual return: 12%
Time needed to reach Rs 5 crore: Around 26 years
These increasing investments, combined with compounding at 12% returns, can help the total corpus grow to over Rs 5 crore in nearly 26 years.
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