Pensions – Impact of Compounding and Taxes

In our blogpost (Market Volatility and Pensions) we had spoken of the beneficial impact of compounding.  What this relates to is the importance of starting early when planning investments so that your investments have a longer time period to grow. The impact of compounding can be very significant and can make a serious impact on what your nest egg looks like at the time of retirement. The compounding effect can be a bigger determining factor than even the monthly or annual saving amount.

Let us take an example of two young men, Suresh and Gaurav, both 20 years old. Suresh saves Rs. 10,000 per year in a Pension Plan for 10 years and never saves again. Gaurav makes no investment for 10 years; and then at Age 29 starts to save Rs 25,000 per year in a Pension Plan.  Assuming that the Pension Plan earns 15% per annum, let’s compare what their individual pension balance will be at Age 55.

The power of compounding is clear from the table below!  Even though Gaurav saves 2 ½ times what Suresh saved for only the first 10 years; after 25 years of contribution, at the time of retirement, Suresh had a larger amount of saving in his Pension Plan.  Starting planning and saving for your Pension early really is critical and can make a significant difference to how much you have when retiring.

The Early Bird gets the Golden Egg!