Mr. Compounding, A Fellow Traveller

As one browses the social media reels or shorts, one financial theme that keeps popping up relentlessly is the “Magic of Compounding on SIPs”. The Finfluencers keep extolling its virtues, trying to shock and awe the young and the impressionable with Compounding’s explosive powers.

All said, these gentle souls are doing their bit to improve financial literacy amongst the GenZ and the Millennials just beginning their professional journey. A journey, we the GenX began 30 to 40 years ago and have reached or about to reach its final destination, Retirement. But while our professional avatars may be fading, we are ready and excited to board the ship to our Golden Years. As we transition to the next phase of our lives, knowingly or unknowingly we bring along our inseparable travel companion Mr. Compounding.

Many amongst us may not fully appreciate how Mr. Compounding’s invisible hand was shaping our financial lives so far. But in our collective lived experience we have felt his presence in all aspects of our financial lives. Be it income, inflation or investment .

We remember our first paycheques. From earning in hundreds or at best low thousands a month 35-40 years back we have come a long way. On the eve of our retirement most of us are making 100-1000 times our initial salaries. In terms of compounding it’s a whopping 15%-20% per year through increments, promotions, switching jobs etc.. Truth be told, for most of us, the biggest magic of compounding is the income we drew from our professional endeavours through our working years.

On the other side of the ledger, as our income grew, so did our expenses. The expenses grew because of inflation and our ever expanding lifestyle and aspirations. At times, we took out loans to fund our expenses (Car, Vacations, White Goods) or to build an asset (Home). We repaid these loans compounded at interest rates ranging from 8% for a Home Loan to 15% for Personal Loan or even 32% for credit cards through EMIs, reducing what we saved for months or even years.

Fortunately, our income growth outpaced the expenses allowing us to save and invest. Our corpus grew through the virtuous cycle of increased savings handed over to Mr. Compounding as investments to do his “Magic” month after month, year after year, decade after decade. The rate of compounding(Return on Investment - ROI) depended greatly on our Risk Appetite and Tolerance enabling us to build the corpus we have today.

Overall, through our journey so far we have kind of grown fond of Mr. Compounding and what he’s helped us achieve. The more time we spent working, the more our income grew and so did our savings and investments. Mr. Compounding worked relentlessly alongside us building our Retirement Corpus.

As we usher in Retirement, our relationship with Compounding gets a makeover. With the onset of retirement we turn conservative. We move our money to a low risk portfolio. With no income and low ROI, we are putting our investments on a diet. However, our expenses are still compounding through inflation over time and are perhaps higher than the low risk ROI we earn. Some amongst us secretly knew all along, Mr. Compounding would not be happy. Once retired, they would like to part ways with Mr. Compounding. It was great knowing you. We had a great time, but now we’d like to move on.But Mr. Compounding is not going anywhere. He isn’t retiring. He’s sticking around for better or worse, “Till Death Do Us Part”. And he is hopping mad.

To Mr. Compounding, Retirement is a transgression we committed and he has vowed to exact revenge. The battle lines are drawn and till our last breath we are now at war with Mr. Compounding.

Retirement is like a switch that flips the giant Compounding machine into reverse. With paycheques stopping and expenses growing, low risk ROI is unable to keep pace. Time, our faithful friend through our earning years turns on us and Compounding Magic turns to Voodoo. Using time and inflation, Mr. Compounding starts eroding the same Corpus it helped us once build. For every lived year in retirement, it takes a bigger pound of flesh off our Corpus. He is sworn to ravage our savings and leave us in tatters. We Retirees endlessly worry about outliving our Retirement Corpus. Mr. Compounding looms large over our Golden Years darkening our souls, filling our hearts with doubts. For most, Golden Years will be an endless battle of attrition with Mr. Compounding and inflation.

The question every Retiree wants answered is “Do I have enough reserves to outlast Mr. Compounding’s brutal war on my Corpus“. But there is another question lurking out there, “Is there another way? Is there a way we can still be friends with Mr. Compounding and protect our corpus?”

The answer to the first question lies in factors mostly outside our control. Both inflation and longevity are great unknowns. The brute way of securing our Retirement is to sacrifice it. Spend the best of the Golden Years building an ever bigger moat of Corpus to keep Mr Compounding and inflation out.

The smarter way is focus on the second question. Find a way to eat our cake and have it too. Ensure we stay friends with Mr. Compounding allowing us to not only enjoy the fruits of our labor but also leave behind a rich legacy for our heirs.

Retirement Yatra is the friend, philosopher and guide that helps you get along with Mr. Compounding through your Golden Years!