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Can 20-Somethings Save Twice Their Income By 35?

Author: Adhil Shetty/Wednesday, July 11, 2018/Categories: Financial Planning, Expert View

Can 20-Somethings Save Twice Their Income By 35?

When a financial website in the U.S. suggested that the ideal size of your savings at 30 years should be the same as your income and at 35 should be twice your income, the millennials in the country trolled the idea all together stating it to be impossible. 

The outraged 30-somethings talked about their obstacles to even save up enough for retirement. The debt from education loan sometimes hovers over the head even in 50s.

Agreed, given the large debt sizes and expensive life events in the U.S., trying to save 2X by 35 is quite a high target. However, when it comes to India, youths have lesser challenges compared to their U.S. counterparts in terms of the quantum or education loan or any other expenses. So, is it possible for the youth in India to target this corpus at 35?

Is it possible?

The answer is yes. Well, it’s not a cake walk. To start with, you need to inculcate the habit of investing early. The rest is about making smart choices and maintaining discipline.

You need to set aside about 15 per cent of your annual income every year and invest in aggressive assets such as equity mutual funds which have done very well over the long-term, providing 10-12% or more over a 10-year period. Conservative assets such as PPF or fixed deposits will not offer you such high return. So, choose the right investment instruments to be able to hit the 2X target.

 

Let’s see how it works

Age

Annual Salary (Growing by 10%)

Savings (15% of Income)

MF SIP Investments (CAGR: 12%)

Savings-To-Income

22-23

300,000.0

45,000.0

48,035.0

0.2

23-24

330,000.0

49,500.0

106,965.0

0.3

24-25

363,000.0

54,450.0

178,654.0

0.5

25-26

399,300.0

59,895.0

265,246.0

0.7

26-27

439,230.0

65,884.5

369,214.0

0.8

27-28

483,153.0

72,473.0

493,400.0

1.0

28-29

531,468.3

79,720.2

641,073.0

1.2

29-30

584,615.1

87,692.3

815,983.0

1.4

30-31

643,076.6

96,461.5

1,022,438.0

1.6

31-32

707,384.3

106,107.6

1,265,372.0

1.8

32-33

778,122.7

116,718.4

1,550,444.0

2.0

33-34

855,935.0

128,390.3

1,884,128.0

2.2

34-35

941,528.5

141,229.3

2,273,837.0

2.4

Let’s assume that you are 22 now and your income, irrespective of its size, will grow at 10 per cent every year. So you have 13 years to save double the amount you will make at 35. You need to set aside 15 per cent of your annual income and put it in an investment plan that will fetch average returns of 12 per cent per annum over the investment tenure. Equity mutual funds are your go-to investment instrument.

Start investing in a mutual fund through Systematic Investment Plan (SIP), aiming for a return of 12 per cent annually.

You will accumulate an amount worth the size of your income at 28 and twice the size of your income by the time you hit 33. If you are able to build a corpus of that size by 35, it sets you up very well for the rest of your life to earn compounded returns on existing investment, thus creating wealth at an even faster rate in your later years.

In the illustration, we’ve taken the example of a person starting to earn Rs 3 lakh a month at 22, getting increments of 10 per cent every year and reaching an income of Rs 9.41 lakh by 35. By age 35, his savings will be Rs 22.73 lakh, which is 2.4X his income at that age.

The thing about this investment plan is that if you start it late, you’ll fall short of your goal or else you will have to save a lot more in the remaining time to reach the target. Say you had zero savings till 28. You will have to invest 30 per cent of your income to be at 2X by 35. If you started at 30 with zero savings, you’ll need to set aside 40 per cent to be 2X by 35. So the earlier you start the wealthier you become.

Which Funds To Pick

As mentioned earlier, the right investment instrument is equity mutual funds. The 10-year category average returns for all equity funds have been at or above 11.80 per cent, as per the CRISIL AMFI Equity Fund Performance Index for March 2018. Balanced mutual funds, which invest in both equity and debt have offer a 10-year-average return of 12.53 per cent. Mutual fund investments, being market-linked products, are exposed to a certain degree of risk and do not offer guaranteed return. However, staying invested over a longer period of time mitigates risk and fetches high return. ELSS can also give tax benefits under Section 80C.

The writer is CEO, BankBazaar.com

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Adhil Shetty
Adhil Shetty

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