What is compounding and how can it boost your retirement savings?

December 7, 2015 Off By ridhi

Compounding is a process where you earn interest on interest. This can increase your retirement benefits to a great extent. It’s advised to opt for this plan because at the end of a particular term, the principal amount grows at an exponential rate. If you collect your interest amounts every year, which is the dividend option, you might be left with a smaller sum, which will not give the compounding effect to the optimal extent. To get more clarity on this concept, you can contact your financial advisors/retirement financial advisors. They will guide you on how to make maximum use of this compounding concept for your advantage. As Retirement is goal which has two phases, the first one is accumulation phase and the last one is the utilization phase, it’s important to understand the power of compounding and how it’s ripple effect can earn you handsome amount so that you live your retirement comfortably. Following are few of the pointers on how power of compounding can boost your retirement savings. Start early


Retirement planning experts all over the world recommend one golden mantra to investors if they want to witness the power of compounding – to start early. The time when you begin your career is also the most apt time for you to start your retirement planning. Use a retirement wealth calculator easily available online, key in your current details like age and salary, incorporate expenses that you foresee for the future and enter the age by which you want to retire. The calculator gives you details like retirement amount that you need and the amount that you need to set aside every month for this. Now, try to invest this amount in the best performing Mutual Funds. See the performance of your investments year on year and change the Mutual Fund scheme if it’s not performing up to the mark. One thing to note and is critical at this point is to have Insurance only for Insurance. Don’t take insurance plans in the name of investment. Sit back and watch your corpus grow to an extent that you never imagined!

Modus operandi

If you have invested 100 INR in a plan at 5% interest per annum, during the second year, you will get an accumulated income of 105INR. In a simple interest concept, you can withdraw the interest earned of 5 INR and keep investing the principal amount alone year after year. However, in a compound interest concept, the entire 105INR is re-invested back into the plan. Due to this, interest for the 2nd year would be 110.25INR (5% of 105). This way, in about a decade and a half, you can easily get 100% return on your investments. Many savings calculator India websites give you the calculation within minutes. You can see for yourself, how compounding will do wonders to your retirement corpus.

Don’t Redeem your Retirement Corpus

It’s recommended that you shouldn’t redeem your retirement corpus to fulfil any other goals of your life e.g. Child’s Education/ Marriage, House, Car etc. We intend to carve out the corpus which is big to fulfil the dreams which requires smaller amount. Rather one should have various investment buckets to fulfil the smaller dreams. Retirement is the biggest investment goal which requires discipline and one shouldn’t take out the money to enable the power of compounding help the investments build a larger corpus.