Use the Retirement Planning Calculator to see the Power of a Rs. 500 SIP

Posted On: 27 August 2024

Planning for retirement might seem like something you need to do in the distant future, but financial wisdom suggests otherwise. However, individuals who are young or early in their career may put off retirement-planning, believing that investing is only worthwhile if they can afford to put in large sums of money.

In reality, the earlier your start – especially when investing in equities – the more potential your money has to grow. This is because in the long-term, equity investments (such as stocks or equity mutual funds) can yield higher returns than traditional investment avenues, resulting in significant wealth-building potential over time.

This makes it possible to work towards building a retirement corpus even with a few thousand rupees, provided you start early and increase your investments when your finances permit. Investing small amounts regularly through Systematic Investment Plans (SIPs) makes it possible to build a substantial corpus over time.

SIPs allow you to invest a fixed amount at regular intervals (daily, weekly, monthly, quarterly, etc.) With the right tools, a little bit of understanding, and a smart financial strategy, you can see just how powerful these small but regular investments can be.

Two such tools that can help you visualise this are the retirement planning calculator and the SIP calculator. In this article, we’ll take a closer look at how to use these calculators to plan your investments.

Table of contents

Understanding the retirement planning calculator
Starting small but early
The benefits of opting for step-up SIP

Understanding the Retirement Planning Calculator

A retirement planning calculator is an online tool that helps you estimate how much money you will need for retirement and how much you should save every month to potentially reach that goal.

These tools typically take into account your current age, retirement age and the return rate on your investments to help you estimate what your retirement corpus should be and how much you need to invest each month to potentially reach that amount.

The Bajaj Finserv AMC Retirement Calculator is one such tool that helps you determine a suitable monthly SIP amount based on your desired corpus size. The tool also factors in inflation to give you a realistic estimate of your retirement corpus and investment requirements.

Here’s how to use the Bajaj Finserv AMC Retirement Calculator:

Enter your age: This should be your current age.
Enter your retirement age: This is the age at which you plan to retire.
Enter your desired corpus size: This is the amount you think you need to lead a comfortable life after retirement.
Enter the expected rate of inflation: Inflation reduces the purchasing power of money over time, so it’s important to factor this in.
Enter the expected rate of return on your investment: This is the annual percentage return you expect to earn on your SIP.
Enter current savings: You can enter ‘0’ if you don’t have any savings.

Once you input these details, the calculator will show you how much your SIP amount needs to be to potentially reach your desired corpus. This can help you understand if your current investment strategy is on track or if adjustments are needed. By adjusting the inflation rate, the retirement age and the corpus size, you can also see how different factors can influence your planning. This allows you to make informed decisions and take control of your retirement planning.

For instance, say you want a retirement corpus of Rs 2 crore and you are presently 25 years old, with the aim of retiring at the age of 60. You expect your investments to grow at 12% per year on average and expect an inflation rate of 7% annually. The calculator will show you that your inflation-adjusted corpus at the end of 35 years will need to be Rs 21.35 crore (approx). For this, you will need to save Rs 33,204 through monthly SIPs. Do note, however, that the calculator’s projections are based on your inputs. In reality, returns are not guaranteed, and the rate can fluctuate based on market movements.

Starting Small but Early

An SIP of Rs 33,000 may seem out of reach for someone who is just starting out with their career. Would that mean that one should not start saving for retirement till the time that they can afford to invest that amount? This can be a detrimental approach. Instead, it can be much more beneficial to start investing whatever amount one can comfortably afford and step up your investments when your finances allow it.

For instance, say you’re a fresher who has just started your first job and can only invest Rs 1,000 a month for retirement. You seek to retire 37 years later, at the age of 60. If you invest Rs. 1,000 a month in an equity scheme where you expect a 12% return, you can build a corpus of approximately Rs. 82.75 lakh. With time, as you increase your investments, you can move more efficiently towards your post-retirement corpus.

The reason why starting early is so important is because of the power of compounding.

This is one of the most powerful concepts in investing. Compounding is the process where the returns on your investment start earning their own returns. The longer you stay invested, the more effective the power of compounding will be.

Starting early is key. If you delay investing, you will need to invest much more money to work towards the same goal because you’ll miss out on several years of compounding. So, even if you can’t afford to put in a large sum, it is better to start small and benefit from compounding rather than not to invest at all. The corpus you accumulate through your early contributions can give a boost to financial strategy later on.

The Benefits of Opting for Step-Up SIP

Finally, while starting with Rs. 500 is a great beginning, increasing your SIP amount over time can significantly boost your retirement corpus. This is where the concept of a step-up SIP comes into play. A step-up SIP allows you to increase your SIP amount regularly, for instance, by Rs. 100 every year.

Here’s why this is important:

Accelerated growth: As you increase your SIP amount, the compounding effect is amplified. Each additional contribution not only adds to your investment but also generates returns, which then start compounding over time. This means your money grows faster, and you build a larger retirement corpus more quickly.
Keeping up with inflation: By increasing your SIP amount, you can ensure that your investments keep pace with inflation, which is crucial for preserving your purchasing power after retirement. As costs of living rise, so should your investments, ensuring that your retirement savings are adequate to maintain your lifestyle.
Flexibility: A step-up SIP is flexible and allows you to increase your investment as your income grows, without the pressure to commit a large amount from the start. It’s a manageable way to steadily enhance your savings, making the journey towards your retirement goals smoother and less overwhelming.

To simplify this process, consider using a Step Up SIP Calculator. This tool lets you visualize the impact of gradually increasing your SIP (Systematic Investment Plan) contributions on your overall investment. For example, if you start with Rs. 500 and increase it by Rs. 100 every year, your retirement corpus could grow much faster compared to a flat investment of Rs. 500 SIP throughout. This strategy ensures that as your financial situation improves, your investment potential grows, leading to a more substantial retirement fund.

Conclusion

Retirement planning doesn’t have to be complex or challenging, especially when you can use well-designed tools like the retirement planning calculator. By understanding the power of compounding, starting early, and opting for a step-up SIP, you can turn even a modest investment into a substantial corpus. Over time, as your financial means increase, you can ramp up your SIP contributions. The key is to stay consistent, keep increasing your investments over time, and use the calculator to regularly check if you’re on track to meet your retirement goals.

FAQs

How does a retirement planning calculator work?

A retirement planning calculator helps you estimate how much money you’ll need for retirement and how much you should save each month to reach that goal. It considers factors like age, retirement age, monthly expenses, inflation, and investment returns.

What is the power of compounding?

Compounding is the process where the returns on your investment start earning their own returns. The longer you stay invested, the more your money grows exponentially.

Why is it important to start investing early?

Starting early gives your investments more time to grow, benefiting from the power of compounding. Even small amounts can grow into a significant retirement corpus over time.

What is a step-up SIP, and why should I consider it?

A step-up SIP allows you to increase your SIP amount regularly. This helps your investment grow faster, keeping pace with inflation and helping you build a larger retirement corpus.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.