These days, there are a lot of opportunities for youngsters to earn during their college time or after completion of studies. But most of them spend all their money without saving anything.
It always pays to save extra money for your later years that may be used for big ticket purchase like buying house, car, family needs, and higher studies. It can be used for retirement years when you will depend on your savings.
Normally youngsters think that retirement planning needs to be done when you reach 40 or above. Why they should start thinking of retirement savings when they are just 25 years old?
Normally people work about 40 years from age of 25 years to 65 years. During these 40 years they need to provide for assets like a house, good education for the children, some insurance, maybe a car, etc.
They need to spend money on vacations, medical needs for family, marriage, etc. On top of all these expenses, they need to save for 25 years of retired life (from age 65 years to 90 years).
During retired life you will need the same amount of money or even more due to medical expenses, vacations and -- most important -- inflation.
Assume that an age of 65 you need Rs 30,000 for monthly expenses. Then by age of 80 you will need at least Rs 25,000 to maintain a similar life style at zero per cent inflation. Considering 5 per cent inflation, you will need at least Rs 67,000 for monthly expenses to maintain a similar lifestyle.
All these expenses will be met through income earned during your working life. So more money saved during working life, better will be retired life.
You may argue that during the initial years in your career, one earns less. Thus, one cannot save more money. But during later years of life one earns more so one will be able to save more money. So why should you start saving some money earlier in your career, when you can save a lot more later in life?
The following example will explain why investing smaller amounts earlier in life is better than saving big amounts later in life.
Namit is careful spender and he ensures to save at least Rs 10,000 every year. Namit starts saving Rs 10,000 every year at age of 25 years. He invests money in various investment instruments like PPF, mutual funds, stocks, property and earns an average 15 per cent compound annual return.
He saves only till age of 40 and then he stops saving due to family obligations like higher studies for children, children's marriage, buying a house and a car.
Gagan, on the other hand, spends all his income during initial years and he is not bothered about retirement planning. When Gagan turns 40 years, he realises that he need to start saving for retirement too.
Gagan starts saving Rs 80,000 every year at age 40. He invests money in various investment instruments like PPF, mutual funds, stocks, property and earns an average 15 per cent compound annual return.
Both Namit and Gagan retire when they get 65 years old. So they are not able to invest any extra money for retirement after 65 years age.
At age 65, who will have more money? Your initial guess will be that Gagan will have more money because:
1. Namit was saving just Rs 10,000 every year while Gagan was saving Rs 80,000 every year.
2. Namit saved money for just 15 years (from age 25 to 40). But Gagan saved money for 25 years (from age 40 to 65).
You will be surprised to know that Namit will have more money at the age of 65 and Gagan will be far behind compared to Namit.
See the tables below to see how this happens and then read on after the tables too.
| Age |
Namit saving Rs 10,000 yearly, from age 25 to 40 | |||
|
Amount Invested |
Total Amount at year beginning |
Interest @15% |
Total Amount at year end | |
|
25 |
10,000 |
10,000 |
1,500 |
11,500 |
|
26 |
10,000 |
21,500 |
3,225 |
24,725 |
|
27 |
10,000 |
34,725 |
5,209 |
39,934 |
|
28 |
10,000 |
49,934 |
7,490 |
57,424 |
|
29 |
10,000 |
67,424 |
10,114 |
77,537 |
|
30 |
10,000 |
87,537 |
13,131 |
100,668 |
|
31 |
10,000 |
110,668 |
16,600 |
127,268 |
|
32 |
10,000 |
137,268 |
20,590 |
157,858 |
|
33 |
10,000 |
167,858 |
25,179 |
193,037 |
|
34 |
10,000 |
203,037 |
30,456 |
233,493 |
|
35 |
10,000 |
243,493 |
36,524 |
280,017 |
|
36 |
10,000 |
290,017 |
43,503 |
333,519 |
|
37 |
10,000 |
343,519 |
51,528 |
395,047 |
|
38 |
10,000 |
405,047 |
60,757 |
465,804 |
|
39 |
10,000 |
475,804 |
71,371 |
547,175 |
|
40 |
10,000 |
557,175 |
83,576 |
640,751 |
|
41 |
- |
640,751 |
96,113 |
736,864 |
|
42 |
- |
736,864 |
110,530 |
847,393 |
|
43 |
- |
847,393 |
127,109 |
974,502 |
|
44 |
- |
974,502 |
146,175 |
1,120,677 |
|
45 |
- |
1,120,677 |
168,102 |
1,288,779 |
|
46 |
- |
1,288,779 |
193,317 |
1,482,096 |
|
47 |
- |
1,482,096 |
222,314 |
1,704,410 |
|
48 |
- |
1,704,410 |
255,662 |
1,960,072 |
|
49 |
- |
1,960,072 |
294,011 |
2,254,083 |
|
50 |
- |
2,254,083 |
338,112 |
2,592,195 |
|
51 |
- |
2,592,195 |
388,829 |
2,981,024 |
|
52 |
- |
2,981,024 |
447,154 |
3,428,178 |
|
53 |
- |
3,428,178 |
514,227 |
3,942,404 |
|
54 |
- |
3,942,404 |
591,361 |
4,533,765 |
|
55 |
- |
4,533,765 |
680,065 |
5,213,830 |
|
56 |
- |
5,213,830 |
782,074 |
5,995,904 |
|
57 |
- |
5,995,904 |
899,386 |
6,895,290 |
|
58 |
- |
6,895,290 |
1,034,293 |
7,929,583 |
|
59 |
- |
7,929,583 |
1,189,438 |
9,119,021 |
|
60 |
- |
9,119,021 |
1,367,853 |
10,486,874 |
|
61 |
- |
10,486,874 |
1,573,031 |
12,059,905 |
|
62 |
- |
12,059,905 |
1,808,986 |
13,868,891 |
|
63 |
- |
13,868,891 |
2,080,334 |
15,949,225 |
|
64 |
- |
15,949,225 |
2,392,384 |
18,341,608 |
|
65 |
- |
18,341,608 |
2,751,241 |
21,092,850 |
All figures in rupees
Gagan saving Rs 80,000 yearly, from age 40 to 65 | |||
|
Amount Invested |
Total Amount at year beginning |
Interest @15% |
Total Amount at year end |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
- |
- |
- |
- |
|
80,000 |
80,000 |
12,000 |
92,000 |
|
80,000 |
172,000 |
25,800 |
197,800 |
|
80,000 |
277,800 |
41,670 |
319,470 |
|
80,000 |
399,470 |
59,921 |
459,391 |
|
80,000 |
539,391 |
80,909 |
620,299 |
|
80,000 |
700,299 |
105,045 |
805,344 |
|
80,000 |
885,344 |
132,802 |
1,018,146 |
|
80,000 |
1,098,146 |
164,722 |
1,262,867 |
|
80,000 |
1,342,867 |
201,430 |
1,544,297 |
|
80,000 |
1,624,297 |
243,645 |
1,867,942 |
|
80,000 |
1,947,942 |
292,191 |
2,240,133 |
|
80,000 |
2,320,133 |
348,020 |
2,668,153 |
|
80,000 |
2,748,153 |
412,223 |
3,160,376 |
|
80,000 |
3,240,376 |
486,056 |
3,726,433 |
|
80,000 |
3,806,433 |
570,965 |
4,377,398 |
|
80,000 |
4,457,398 |
668,610 |
5,126,007 |
|
80,000 |
5,206,007 |
780,901 |
5,986,909 |
|
80,000 |
6,066,909 |
910,036 |
6,976,945 |
|
80,000 |
7,056,945 |
1,058,542 |
8,115,487 |
|
80,000 |
8,195,487 |
1,229,323 |
9,424,810 |
|
80,000 |
9,504,810 |
1,425,721 |
10,930,531 |
|
80,000 |
11,010,531 |
1,651,580 |
12,662,111 |
|
80,000 |
12,742,111 |
1,911,317 |
14,653,427 |
|
80,000 |
14,733,427 |
2,210,014 |
16,943,441 |
|
80,000 |
17,023,441 |
2,553,516 |
19,576,958 |
All figures in rupees
Few points to observe
1. Namit invested a total amount of Rs 150,000, whereas Gagan invested total amount of Rs 20,00,000.
2. Gagan invested more than 13 times the amount invested by Namit.
3. Still at retirement age, Namit was Rs 15,15,892 richer than Gagan.
4. At age of 40, Namit was earning more than Rs 80,000 every year just on interest income. So even if Namit was not investing any money from age of 40 onwards, the interest component was taking care of the growth of his investment till he was 65 years old.
5. Due to this, even though Gagan was investing Rs 80,000 every year from age of 40 onwards he will still lag behind Namit forever.
6. Even if Gagan and his family invests Rs 80,000 for next 1,000 years, they will still not be able to beat Namit in terms of total wealth accumulated.
7. After retirement, Namit will continue to get Rs 27,51,241 every year as interest, even though he invested just Rs 150,000.
Conclusion
It always pays to invest early in life. Even if invested amount is very small it can grow big over time due to compounding returns.
The author works with a software company in Bangalore. The opinions expressed here are personal.
