Knowledge about Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), the impact of inflation, and how compounding interest works in wealth growth is crucial to accumulating a sizeable corpus in the long term, said Navneet Batra, co-head of retail sales at Bandhan Mutual Fund, during a session at the 40After40 Retirement Expo at Pragati Maidan in New Delhi on Friday.
Batra underscored the importance of long-term planning with the example of Grace Groner, an American philanthropist, who donated $7 million at age 65 and went on to work until her death at 85. He compared her life with that of Richard Fuscone, then vice chairman of Merrill Lynch, who declared bankruptcy at 45. Batra stressed that the correct lesson to learn is from the life of the grace donor and not the finance wizard Fuscone.
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Batra highlighted three major concerns of a retiree: inflation, inadequate savings and market volatility, whose solution is to start retirement planning early to absorb such risks in the long term.
Compounding Income
To explain the compounding benefit of starting early, he gave the example of Venkat, Rohan, and Mihir, who started retirement planning at 50, 40 and 30 years, respectively. They all invested Rs. 10,000 monthly until the age of 60. At retirement, their accumulated corpus was Rs. 25.88 lakh, Rs. 1.01 crore and Rs. 3.65 crore, respectively. This vast difference was due to their investing period. The longer they stayed invested, the longer they could earn compounding interest. Mihir, 30, earned more compounding interest than Venkat, who accumulated the least wealth as he started only 10 years before retirement.
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Compounding interest can make all the difference in your retirement planning.
What is SWP?
A Systematic Withdrawal Plan (SWP) allows investors to withdraw funds at a pre-determined limit and frequency, such as weekly, quarterly, monthly, half-yearly or yearly. In the case of Mihir, he further invested that corpus in SWP with an average 8 per cent return. Batra explained that Mihir could withdraw Rs. 2.5 lakh monthly or Rs. 30 lakh yearly. The total withdrawals between 60 and 80 years of age were Rs. 6 crore, and he was still left with Rs. 3.27 crore at the end of 80 years with the help of compounding. The SWP plan yielded great results and allowed him to live a dignified lifestyle even during higher inflationary pressure.