Build a ₹5 crore fund with an annual salary of ₹12 lakh; here is the math behind SIPs

Retirement Planning: A retirement fund of ₹5 crore can be built over 30 years even with an annual salary of ₹12 lakh. A retirement corpus of approximately ₹5 crore can be created through a combination of EPF and step-up SIPs.

Retirement Planning: Can someone earning ₹12 lakh annually build a ₹5 crore fund by retirement? At first glance, it might seem difficult, but this goal is achievable through the right strategy, regular investment, and the power of compounding.

According to a Moneycontrol report, if an individual starts planning for retirement at age 30 and invests consistently until age 60, a fund of ₹5 crore can be created.

How much of a fund will be created through EPF alone?

According to the report, if an employee has an annual salary of ₹12 lakh and both the employee and the company contribute 12% each to the EPF based on the statutory wage ceiling of ₹15,000, a total of ₹3,600 will be deposited into the EPF monthly.

If the EPF earns an annual interest of 8.25% and the investment continues for 30 years, a fund of approximately ₹57 lakh could be accumulated by retirement. This example takes the new tax regime into account.

However, if both the employee and the employer contribute 12% each of the employee's basic salary (assuming it is 50% of the CTC) to the EPF, the employee's in-hand salary would drop to around ₹88,000 per month. Yet, the long-term benefits would be significant. According to Moneycontrol, in such a scenario, a fund of approximately ₹1.9 crore could be generated from EPF alone after 30 years.

The report also notes that the actual amount may vary based on the salary structure, annual salary increments, and future EPF interest rates.

How can SIPs help in reaching the ₹5 crore target?

If you receive approximately ₹1.9 crore from your EPF, you would need an additional ₹3.1 crore to reach the ₹5 crore target.

According to Moneycontrol, this gap can be bridged using a 'step-up SIP.' With this approach, the SIP contribution amount increases annually in tandem with the rise in your income.

The report suggests that if an individual starts by investing just 5% of their monthly in-hand salary—roughly ₹4,000 to ₹5,000 per month—in an SIP and increases this investment by 8–10% each year, they can build a substantial retirement corpus over 30 years.

If the SIP yields an average annual return of 11–12%, this investment could grow into a corpus ranging from ₹3.1 crore to ₹3.5 crore.

Why is a step-up SIP considered a superior strategy?

According to the report, the key advantage of a step-up SIP is that investors can start with a small amount. As their salary rises, the investment amount increases accordingly. This avoids placing excessive strain on the monthly budget while allowing the investor to reap the benefits of compounding over the long term.

What factors should be considered before investing?

Speaking to Moneycontrol, Sarvjeet Singh Virk, CEO of jUMPP, noted that retirement planning is not limited merely to building a large corpus. Before starting investments, it is crucial to create an emergency fund covering 6 to 12 months of expenses, secure adequate health and life insurance, and avoid high-interest debt.

He added that periodically reviewing investments, maintaining portfolio diversification, and utilizing AI-based financial planning tools when necessary can also prove beneficial.

What is the key takeaway?

Experts believe that the most effective way to accumulate a substantial retirement corpus is to start early, maintain regular investments, and increase the investment amount annually. Rather than waiting for the 'right time' in the market, disciplined investing can yield better results in the long run.