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Which stage of your career is most important for wealth creation?

Posted on 17 Apr 2024
Author: Sayan Sircar

Tags: Portfolio Construction

6 mins read
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This article looks at the various stages of your career from the perspective of maximum wealth creation.

Which stage of your career is most important for wealth creation?

Disclaimer: Life does not work like an Excel sheet (plans change) and stock markets (which go both up and down) do not behave like fixed deposits. This article should be used as an exercise in understanding relative concepts rather than absolute numbers.

📚 Topics covered:

Wealth creation vs. career stage
Year-wise investment and return contribution to portfolio growth
Doubling of the portfolio every five years
Compounding effect: investment returns vs capital invested
Impact on FIRE aspirants

Wealth creation vs. career stage

This post builds on two previous articles:

The next article in this series is here: How easy is it to double your portfolio?

The essence of these two posts is that:

the highest portfolio growth comes when you invest more and more over time due to increasing income
increasing the amount invested, as a step-up-sip, creates more wealth

Compounding formula

This formula is an example of an exponential curve where the current period growth happens on the entire corpus from the previous period. A good example is simple vs compound interest:

simple interest: 100 > 110 > 120 > 130 > 140 etc
compound interest: 100 > 110 > 121 > 133 > 146 etc

This interest-upon-interest feature is the reason compounding grows so fast and is the premise of this quote:

My life has been a product of compound interest” - Warren Buffett.

This article shows how much wealth is actually created over time in each decade of your career along with the interplay of the invested amount and the return you get.

Year-wise investment and return contribution to portfolio growth

In the chart above, we have shown the impact of a 10% portfolio return created by a 10% step-up-sip. The first SIP is ₹25,000/month and the SIP amount is increased by 10% per year. So the amount invested in year 1 is ₹3 lakhs, in year 2 it is ₹3.3 lakhs and so on for 30 years. The investor starts investing in their late 20s.

Decade	Investment (₹ lakhs)	Return (₹ lakhs)	Portfolio (₹ lakhs)	Change (₹ lakhs)
First 10 years	47.8	28.3	76.1	76.1
Next 10 years	171.8	231.8	403.6	327.5
Last 10 years	493.5	1,111.4	1,604.9	1,277.4

As the table shows, the first decade is the only period where the amount invested (47.8) is more than the return generated (28.3). This is because due to only 10 years having passed, there is no chance of the compounding effect to kick in.

The next decade is where things become more interesting:

the amount invested (171.8) in that decade is higher than the portfolio value (76.1) reached in the previous decade. This result is due to the 10% income growth due to human capital being put into use
the return amount (231.8) is higher than the invested amount (171.8) for the first time
the portfolio value (403.6) is more than 5x the value in the first decade (76.1)

The last decade is now clearly the most important for the portfolio. The amount invested (493.5) is itself higher than the total portfolio value (403.6) in the first two decades. The investment return (1,111.4) is more than double the amount invested (493.5).

We break down the table into 5-year chunks to show the effect more clearly.

Years completed	Investment (₹ lakhs)	Return (₹ lakhs)	Portfolio (₹ lakhs)	Change (₹ lakhs)
5	18.3	5.1	23.4	23.4
10	29.5	46.6	76.1	52.8
15	65.8	120.1	185.9	133.2
20	106.0	297.6	403.6	270.4
25	189.0	632.4	821.4	551.0
30	304.4	1,300.5	1,604.9	1,053.9

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Doubling of the portfolio every five years

Splitting the portfolio table into 5-year chunks brings out another interesting observation.

Years completed	Portfolio	Change in 5y
5	23.4	N.A
10	76.1	3.26x
15	185.9	2.44x
20	403.6	2.17x
25	821.4	2.04x
30	1,604.9	1.95x

We can see that every five years, the portfolio value doubles. We have seen a similar result in our previous article:

FIRE journey in India: what happens if you work just a bit longer

To understand how portfolio growth happens at various career stages:

Also read
I have heard of goal-based investing. What now?

Compounding effect: investment returns vs capital invested

Year-wise split of investment and return in the portfolio

As time passes, the amount of wealth created is driven more by the return on your capital than the invested amount.

Compounding: Corpus = Base * (1 + return% ) ^ Time

This result is due to the increasing base effect in the compounding equation.

Impact on FIRE aspirants

As we had discussed in our post titled FIRE journey in India: what happens if you work just a bit longer, the longer you can work, the higher your SWR is in FIRE.

If you are consciously cutting out years from your pre-retirement accumulation phase, you need to find a way to reach your FIRE goal faster: What is the quickest way to reach FIRE?.

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