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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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John Bogle’s calculation

Posted by Muthu on December 26, 2014

“This is one of the most important rules of investing. If you never peek from the age of 20 to the age of 70, you’ll rip that first 401(k) statement open at age 70, and I recommend you have a doctor on hand because you’ll go into a dead faint. Your heart might even stop. You’re going to have an amount of money you can’t even imagine.” – John Bogle

This statement kindled my interest and I wanted to calculate the same for someone who at the age of 25 starts saving Rs.10,000 every month till he reaches 75 and wants to leave the money for his grand children.

John Bogle has mentioned the age 20 to 70. Since Indian kids start their career a bit late, usually after completing post graduation, I assumed age 25 to 75. Why grand children because, 50 years of savings would be useful only to them; neither the investor nor his children may be able to enjoy its fruits.

Since I’m confident that for next 20 years, Indian markets are capable of producing 18% annualised returns, I’ve assumed the same rate for the young man (from age 25 to 45). For the subsequent 20 years (age 45 to 65), I’ve assumed a rate of 12% and for the last 10 years (age 65 to 75), I’ve assumed a rate of 9%.

If he keeps investing 10K month on month, for next 50 years, and get the above rate of return, he would have accumulated Rs.65.21 crores. Just 10K a month produces 65 crores.

If you want to know, today’s value of that Rs.65.21 crores, we’ve to calculate the present value after adjusting for inflation. RBI is projecting an inflation of 4 %(+) or (-) 2% over long run. Assuming an inflation of 4%, in today’s money, it is worth Rs.9.17 crores.

Rs.9.17 crores is not a small amount in today’s terms to leave for one’s grand children. You would be able to do the same by investing 10K a month for a very long period. 10K per month would become light on anyone’s purse after 10 or 20 years. So without pinching one’s pocket, anyone can plan a good inheritance for his grand children.

So John Bogle is right. This is the power of compounding, power of long term, power of patience and the power of time. As I always emphasise, there is no substitute for time in investing.

No, I’m not asking you to save for your grand kid for next 50 years. It’s your choice. But please do understand the role of time in investing. That’s why we encourage you to have investment tenure as long as possible.

If you can understand and internalise power of compounding and the role of time; you would be extremely successful financially.

3 Responses to “John Bogle’s calculation”

  1. ERI said

    You cant both have equity returns of 18% and inflation of 4% at the same time. You need to calculate the present value by assuming real rate of return of maybe 2-3%. That will be far more rational number.

  2. Why stopping with teaching power of compounding to one generation? If a 20 year old son is advised to start with 10KPM, his father should be taught to save the amount required to reach that 9.5 Cr. figure. And the grand father shall be taught how to plan to make “that” monthly saving so that his son shall have the capacity to build “that” 9.5Cr ROI strategy….
    If the grand child inherits 65Cr on his 20th Birthday, how should he plan to make his son, grandson…..happy , and what would be the strategy……
    I think…….1KPM…..5KPM……10KPM……50KPM……100KPM…..
    Any comments?

  3. srinivas said

    Amazing. Was surprised to read. But I think that is compounding and its power. As someone noted in India equity is used for intergenerational wealth transfer. Now I agree on the wealth part in that argument

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