5% Increase In SIP Every Year: The Hidden Recipe For Early Retirement

There are challenges in retirement planning and SIPs make it easier and even more achievable through step-ups, periodic reviews and rebalancing.

Mutual Fund, SIP, flexi-cap

No one wants to face hardship of any kind in old age. It is not entirely within our control, but we can certainly avoid financial hardship with some early retirement planning. People use various investment instruments to build their retirement corpus. Long-term fixed-income investments, equities, real estate and precious metal, to name a few.

But could it be as simple as starting a few SIPs and increasing it by 5% every year? Let us find out.

  • 30X annual income is an accepted marker for calculating retirement corpus

  • 11%-16% return is generally expected from large cap equity mutual fund SIPs

  • Step-up SIP is provided by many investment platforms to automatically increase SIP contribution at a defined interval

The Retirement Math

It is inflation that makes it difficult to estimate the quantum of a retirement corpus. Your monthly expenses when you are 60 will be much higher in money value than what it is when you are 30. Even if you maintain the same lifestyle. 

According to RBI, the average inflation rate in the last 25 years was 5.55%. If your monthly expense is Rs 50,000 today, it would inflate to nearly Rs 2 lakh in 25 years. 

Next, you have to calculate the duration of your retirement corpus is meant to last. Ideally, you would want it to outlive you. The outcome of your retired life span, your monthly expenses and the expected inflation rate would give you an estimate of the retirement corpus.

Also Read: ULIP As Retirement Investment: Should You Consider It For Retirement Planning?

Managing Mutual Fund SIPs

If you look at fixed-income options like FD and PPF, the interest rate earned could be between 7.3% to 8.5%, considering the compounding. However, after considering inflation, the real rate of return falls short of even 3%. An active investor would swear by the long-term benefits of equity investment, but you may not have the time or expertise to ensure such benefits. This brings SIP into the picture.

If you have multiple SIPs active across mid-, small- and large-cap mutual funds or even flexi-cap mutual funds, you must assess their performance and discard the poor-performing ones. You must continue to invest the same amount, but across the high-performing SIPs only. Repeat this process of review and rebalancing of the SIP portfolio every year.

Finally, step up the SIP contribution by 5% each year. Start with high equity exposure, but gradually increase investments in hybrid mutual funds and fixed income instruments as retirement approaches. This is done to avoid volatility as the corpus reaches its goal. 


Underperforming funds can hold back the wealth creation. But through timely financial planning and regular rebalancing of the SIP portfolio, you can reach your retirement corpus faster. So, invest early in SIP, step up the contribution regularly and enjoy an early retirement.

Click here for the latest articles on Retirement Planning

Also Read: Five Retirement Planning Blunders To Avoid

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas. 


Related Article

Premium Articles