Many financial planners and advisors including yours truly will have you believe that it is important to start investing early if you want to have a comfortable retirement corpus. In fact this is the first step I propose in my five step plan to early retirement. After all it makes sense right? You have a long runway if you start early and it will allow compounding to show its effects. Compounding needs time. But is it really all there is to it? The genesis of this thought was an article that I recently read on the internet. While there is a kernel of truth, it is not all its made out to be. Let me try and explain using the information from the article.

If you haven’t read the article, here is the quick summary to help you understand. It starts by suggesting that you will need to invest a large amount of money to build a Rs. 1 crore corpus if you start late. Basically if you start investing when you are 20, you just need to invest Rs. 842 per month to build a corpus of Rs. 1 Cr by the age of 60. Instead if you started at the age of 50, you will need to invest Rs. 43,000 per month to reach the same goal. More than 43x the amount if you had started investing in 20. The returns assumed were 12%.

There is nothing wrong with the numbers, but there is one implicit assumption which is that inflation is 0%. If you are 20 years old, you wouldn’t want to retire with a corpus of Rs. 1 crore by the age of 60 now would you? At the age of 50, a retirement corpus of Rs. 1 crore might make sense. But if you imagine an inflation of 6% for the 20 year old, then a corpus of Rs. 1 Cr at 60 means the equivalent of Rs. 9.22 lakhs in terms of purchasing power in today’s value of money.

Now apply the same logic assuming you are at age 50. So suppose you only needed Rs. 9.22 lakhs in today’s money to retire at the age of 60. Then what is the corpus you need assuming 6% inflation? Well if you learned anything from my post on math behind financial planning, you would know that you need Rs. 17.41 lakhs. And the SIP you need per month is Rs. 7,568 per month which is less than 9x of what you had to invest in your 20s and not nearly as bad as the article would suggest.

Another point the article is missing is that your salary would not grow during those years from 20 to 50. But that is unlikely. If you assume even a moderate 6% salary hike, at 50 years, you will be earning 7.6x of what you were earning at 20 years of age. Lets take some concrete numbers to help us understand. Say you are earning Rs. 10K per month at the age of 20, then your monthly income will become Rs. 76K by 50. So saving more is not a problem at that time. May be all of this is a bit too abstract to wrap our heads around, so I will use some real numbers. Take a look at the table below and I will explain how to read it in a bit.

Age 20 year old 50 year old
Corpus 1,00,00,000 17,41,101
Returns 12% 12%
Years to retirement 40 10
Inflation 6% 6%
Value today 9,72,221 9,72,221
SIP 850 7,568
Salary 10,000 76,122
Salary growth rate 7% -
Saving rate 8% 9.94%

Lets say someone is 20 years old today. If they plan to retire at 60 with Rs. 1 crore, expecting returns of 12% per year, then

• they have 40 years to retire
• if we assume an inflation of 6% then the Rs. 1 Cr is worth Rs. 9.72 lakhs today
• in those 40 years if they invest Rs. 850 every month then they will arrive at Rs. 1 Cr
• if we assume their salary is Rs. 10K today then the saving rate is 8% (Rs. 850 / Rs. 10,000)

Thats not bad right? An 8% saving rate is definitely achievable. Now lets say, there is another person who is 50 years old and does not have any savings just like the 20 year old. Assume the 50 year old also wants to save up Rs. 9.72 lakhs worth of corpus in todays value. Then since they have only 10 years to retire, their corpus needs to be only Rs. 17.41 lakhs (future value) at the time of retirement. That Rs. 17.41 lakhs will buy them the same things they could buy today with Rs. 9.72 lakhs assuming 6% inflation.

Then these statements hold true

• at 12% return on investment, the person needs to invest only Rs. 7,568 per month
• assuming a salary growth rate of 7% the the 50 year old will be earning Rs. 76,122
• then the saving rate is just 9.94% which is very similar to the 20 year old

From all this, it seems like starting early does not seem to make all that much difference. And that is the point about financial planning. You can crunch the numbers whichever way you want to get the outcome you want :). In fact, if you assume only 10% returns on your investments instead of the 12% assumption, then the saving rate for the 20 year old will be 16% and for the 50 year old will be 11%. So is it better to wait until you are old to start saving for retirement?

Any time I read articles like those, I try to find counter arguments like this. Of course I made a lot of assumptions too. It certainly helps to start early for many reasons. One of them is about forming good habits. Habits stick and is difficult to change. So if you start saving early and make it a habit, it is easier later in life to continue saving. If you spend when you are young and continue to do so for ever, eventually you will not have saved up enough for retirement.

Another point is that it starts teaching you about saving from the day you start earning no matter how little instead of blowing off everything. Moreover, when you are young you have fewer responsibilities, no kids to take care of and no home loans to pay. So if you can’t find a way to save when you are young, you will find it even more difficult as you age. Finally one point I would like to make is that you are never too late. Don’t worry if you did not start saving early. You can start even now. As you can see from my table above, it is possible to save at any age. It just takes more resolve and conscious effort since you have not yet formed a habit. Don’t let anyone make you believe that you cannot retire if you start saving late. However, if you want to retire early, then starting early helps a lot.

Updated: 31 August 2023 A reader rightly pointed out that I missed step up SIP and if I do the calculations including it, the numbers will vary significantly. So I decided to redo the numbers with step up SIP and here are the results.

With step up SIP, the 20 year old will have to invest Rs. 533.67 per month and increase the SIP every year. In the examples above, I assumed a salary increase of 7%, which will be the same SIP increment we will use. So in year 1, the 20 year old will invest Rs. 6404 per year (Rs. 533.67 x 12). Next year, they will invest Rs. 6852 (7% increase in SIP) and so on. In the meantime, the investment will grow by 12% every year. Then after 40 years the 20 year old will have Rs. 1 crore. The saving rate is mere 5.34%.

Year Investment Corpus
1 6,404 6,404
2 6,852 14,025
3 7,332 23,040
39 83,760 88,48,642
40 89,623 1,00,00,102

The 50 year old only needs to build a corpus of Rs. 17,41,101 as we calculated earlier. For both of them the value of their corpus is Rs. 9,72,221 in today’s value. To build that corpus in 10 years, they have to invest Rs. 76,452 (Rs. 6370.96 per month) in year 1 and increase the SIP by 7% to Rs. 81,803 in 2nd year and so on like shown below. And the saving rate is 8.37%. So the difference in saving rate is not that much.

Year Investment Corpus
1 76,452 76,452
2 81,803 1,67,429
9 1,31,358 14,29,062
10 1,40,553 17,41,102

But more importantly, if you assume a more reasonable 10% return on investment, the starting step up SIP for 20 year old will be Rs. 825.50 which is 8.26% saving rate and the 50 year old will start with Rs. 6946.73 which is 9.13% saving rate. So there is almost no difference if you start early or late in this scenario. My argument still holds, hopefully with more “apples to apples” comparison. If you see any other mistakes in my calculations, please let me know in the comments below.