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.
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!
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