Rs 5.5 crore retirement goal: How much SIP should you increase every year?
Is setting up SIPs a one-time affair, or should you revisit and adapt them annually?
"Modest steps, when amplified: shape a grand destiny." This famous adage perfectly echoes the essence of Systematic Investment Plan (SIP) investing. Just as small deeds can lead to significant change, small SIPs, when compounded over time, have the potential to revolutionize your financial landscape. SIP investing involves consistently contributing modest amounts of money into mutual funds at regular intervals. It's like nurturing a tiny seed that, over time, grows into a thriving financial forest.
But remember, financial planning is a dynamic journey, much like life itself. As circumstances evolve, so do your goals and income. Is setting up SIPs a one-time affair, or should you revisit and adapt them annually?
As your income soars, your dreams could too.
Think back to your college days when indulging in a restaurant meal or opting for an auto ride instead of a bus was a luxury. Fast forward to the present, and your corporate pay-check might find you seeking nothing less than five-star experiences and luxurious cars. This is the magic of increasing income – it elevates your aspirations and desires.
The money you allocate for a vacation today might fall short for your dreams tomorrow. That budget for a Lonavala getaway could swiftly transform into fantasies of exploring Amsterdam.
This is precisely why your investments need to mirror these burgeoning aspirations. Elevating your monthly SIP contributions has the power to compound your invested capital, making it an effective approach to fulfilling your escalating financial needs.
But how much of an increase is warranted?
Investing isn't a one-size-fits-all formula. While various factors influence SIP planning, two crucial elements determine how much you should augment your SIPs each year:
1. Balancing current affordability with future financial goals
Imagine aiming for a hefty retirement corpus of Rs. 5.5 crore, thirty years from now. Starting today, you'd need a monthly SIP investment of Rs. 15,500 to achieve this goal (assuming a 12 per cent expected return).
However, existing commitments like high monthly expenses, children's education, and loan payments might make affording this amount challenging.
Here's where a clever strategy comes in: the step-up feature. By increasing your annual SIP amount by just 10 per cent, you could hit your Rs. 5.5 crore target with an SIP of only Rs. 6,600, which is less than half the initial Rs. 15,500.
2. Harnessing income growth to fuel your investments
Anticipating an annual salary hike of 8-10 per cent is common, especially for those with stable employment.
Does this mean you should mirror your SIP increments to your salary increments? Not necessarily. When your income rises, fixed expenses often remain steady (factoring in inflation). Consequently, you end up with more surplus to channel into investments.
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Year 1
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Year 2
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Comments
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Monthly in-hand salary
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70,000
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77,000
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Annual Salary hike of 10%
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Expenses to deduct
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Rent
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20,000
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21,600
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Annual escalation of 8%
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Groceries
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10,000
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10,600
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Assuming inflation of 6%
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Car Loan EMI
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7,500
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7,500
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Other expenses
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10,000
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10,600
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Amount for Contigences
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5,000
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5,000
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Total Expenses
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52,500
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55,300
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Saving in hand
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17,500
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21,700
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In hand increases by 24%
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*Figures are for illustrative purposes
This is the magic of compounded growth through SIP step-ups!
Elevating your SIPs can achieve multiple goals, from combating inflation to financing your mounting needs, contingencies, or even expediting early retirement. So, don't just set and forget your SIPs; consider increasing them annually to 'Compound your investments and discount your worries'!
Remember, consistency is key. If unforeseen circumstances prevent a step-up in a given year, you can always recalibrate in the future to make up for it. Your financial journey is a dynamic adventure that evolves with your life – keep stepping up to stay ahead.