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The Power Of Compounding: Building A Strong Retirement Corpus

Find out the importance of time and discipline in maximising the benefits of compounding for long-term wealth growth

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Meghna Maiti
July 24, 2023
The Power Of Compounding

The Power Of Compounding

Albert Einstein, arguably the greatest scientific mind of the 20th century had said: “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

When it comes to investing, compound interest will probably be your best friend, and for this very reason, one has to depend on this eighth wonder of the world if one desires to build a strong retirement corpus.

Says Renu Maheshwari, Sebi-registered investment advisor and chief executive officer and principal advisor, Finzscholarz Wealth Manager, “The power of compounding is the increase in wealth because of the return getting reinvested. This ensures exponential growth after a certain period.”

She says that the retirement corpus is typically built over a long period of time. The longer the period, the easier it is for the money to grow exponentially due to the effect of compounding.

“Remember, it takes the same amount of time for 100 to become 200, 1 lakh to become 2 lakh, and 1 crore to become 2 crore. The sooner you reach the crore mark, the more comfortable will be the corpus,” she adds.

Time Is Your Friend

For the power of compounding to work, you need time on your side.

Let us assume that you need to create a corpus of Rs 5 crore for your retirement (when you reach the age of 60) and for this, you are investing in equity mutual funds which are giving you a return of 12 per cent per annum.

In the first instance, let us say you are 25 years old. In this scenario, you would need to invest about Rs 7,800 every month to reach that corpus.

In the second scenario, let us assume you start investing at the age of 35 years. In this case, you would need to invest about Rs 26,600 every month to build the same retirement corpus.

If you start investing at the age of 45, you would need to invest over Rs 1 lakh every month to arrive at the same corpus. This proves that if you have time on your side, you can harness the power of compounding to your advantage.

Discipline Is Key

However, just as you need to exercise regularly to have a fit body, you need to invest regularly to build a retirement corpus. If you pull out the money to meet other expenses, then you cannot get the optimum benefits from compounding.

“Make sure that no money is pulled out in between if you want this method to work. The money should stay invested without any withdrawal. An active portfolio can undergo rebalancing exercises at intervals, but no money should be withdrawn from the portfolio,” says Maheshwari.

For this, it is essential to follow another basic investing principle – building an emergency fund. An emergency fund is basically six months of your regular expenses that you may need in case of any emergency like a job loss. Having an emergency fund is essential to ensure that you do not pull out money from your retirement corpus in an emergency.

So, it is important to plan early. Back-of-the-envelope calculations will help you estimate the amount of money you need to save every month to reach the desired retirement corpus. This will depend on a lot of factors, like the desired lifestyle you want to lead after retirement. Once you know it, invest regularly, and leave the rest to the power of compounding!

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