Invest earlier, live better - Compounding Effect

 


MPF has carried out for seven years, the idea of "don't falling short" for retirement is generally accepted. The accrued benefit saved through MPF, however, is generally dissatisfy and insufficient to attain the retirement protection. Many MPF participants therefore would make extra savings or participate voluntary MPF contributions. More than that, after the review on the minimum and maximum levels of relevant contribution for mandatory contribution purpose last year, which is conducted at least once every four years, it is proposed to raise the maximum level from the current level of $2,000 to $3,000.

 

Of course, participants can be better prepared for retirement if the related suggestion can be implemented. However, understanding the compounding effect and start your retirement plan as early as you can, the achievement may be more fruitful than making more contributions.

 

Compounding effect represents the initial principal and the returns earned from that and looping in reinvesting over time. Therefore, the earlier you start any investment; the earlier you enjoy the advantage of compounding effect as you got a longer time to reinvest in both initial principal and the related returns.

 

The following manner illustrates 2 situations of different monthly contributions and term years, which are $2,000 for 30 years and $3,000 for 20 years. Both of the total contributions are $720,000, but there is an enormous distinction in the final accumulated amount. Assume that the annual return is 10%, there is a one time difference in the accumulated amount; if the annual return is 15%, it will be more than three times.

 

Increase 50% term years is better than increase 50% contribution
Annual return / contribution $2000p.m. for 20 years $2000p.m. for 30 years $3000p.m. for 20 years
5% $825,493 $1,671,453 $1,238,239
10% $1,531,394 $4,558,651 $2,297,091
15% $3,031,910 $14,019,641 $4,547,865

 

This example illustrates the compounding effect of investing earlier for better life. Contribute $3000 p.m. for 20 years only got $4.55M under 15% annual return. But contributes $2,000 p.m. for 30 years can accumulate $14M under the same annual return. $4.55M may not enough for retirement, but $14M should be more than enough.

 

Although not every one can benefit from investing earlier as the MPF carried out in 2000 and only employees are covered in the plan. However, investing earlier for your self financial planning can be done by yourself. Remember, "plan earlier, live better" is the main point in financial planning.

 

The following manner use another angle to show how powerful is compounding effect under "plan earlier, live better". Assume we have to accumulate $10M during 60 year-old, then how much contributions we should make for each year with 10% annual return given?

 

If we start from 25 years old, the total contributions will be less than $1.1M. If we start from 55 years old, the total contributions will be $7.68M which is seven times more!

 

Age Monthly Contribution Total Contribution
55 HK$128,070 HK$7,684,192
50 HK$48,414 HK$5,809,674
45 HK$23,928 HK$4,307,000
40 HK$13,060 HK$3,134,399
35 HK$7,474 HK$2,242,336
30 HK$4,387 HK$1,579,415
25 HK$2,612 HK$1,097,099

 

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The above information is for reference only and will not be considered as professional opinion and suggestion, and do not contain any intention or inducement to form a contract. Therefore, no investment decision should be made upon the above information. Investment involves risks. Please read corresponding investment information carefully before making any investment decision. If you have any query regarding investment or investment-linked products, please contact your consultant or refer to corresponding Principal Brochure for further information.