Retirement planning: Why the rule of 1% upgrade works better than a 1% increase in SIP amount

Many investors start a systematic investment plan (SIP) with a fixed amount and continue contributing the same amount for years without reviewing it, even as their salary grows. Over time, this could result in investing a smaller proportion of income than originally intended.

Mirae Asset Mutual Fund, in the latest edition of its M-FinBytes, has introduced the “Rule of 1% Upgrade,” a simple strategy in which investors increase their SIP allocation by just one percentage point of income every year.

According to the fund house, “The Rule of 1% Upgrade is not about making a dramatic jump. It is a yearly nudge: increase the share of income directed towards investments by one percentage point, subject to affordability, financial goals, and overall circumstances.”

What is the rule of 1% upgrade?

The strategy focuses on increasing the percentage of income invested, rather than merely increasing the SIP amount by a small percentage.

For example, an investor allocating 10% of annual income to SIP can gradually increase the allocation to 11% in the second year, 12% in the third year, and so on.

Mirae Asset MF notes, “The appeal of this rule is its modesty. It does not ask the investor to overhaul the household budget overnight. It simply creates a yearly checkpoint where investing gets a small promotion too.”

1% increase in SIP amount vs 1% upgrade rule

Suppose an investor earns ₹1 lakh a month and currently invests ₹10,000, or 10% of monthly income, through SIPs. If the SIP amount is increased by 1%, the monthly contribution rises only to ₹10,100.

However, if the investor increases the investment allocation from 10% to 11% of income, the monthly SIP becomes ₹11,000, assuming income remains unchanged.

How can this impact retirement corpus?

Assume an investor earns ₹1 lakh a month and starts with a monthly SIP of ₹10,000. The investment is continued for 25 years, assuming an annual return of 12%.

If the investor simply increases the SIP amount by 1% every year, the monthly contribution rises only marginally, from ₹10,000 to ₹10,100 in the second year, ₹10,201 in the third year, and so on. Over 25 years, the investor contributes around ₹33.89 lakh, resulting in a retirement corpus of approximately ₹1.82 crore.

However, under the rule of 1% upgrade, the investor increases the share of income invested by one percentage point every year.

Assuming the monthly income remains constant at ₹1 lakh for simplicity, the investment amount rises from ₹10,000 in the first year to ₹11,000 in the second year, ₹12,000 in the third year, and so on. Over 25 years, this results in a total investment of around ₹66 lakh and a retirement corpus of nearly ₹2.83 crore.

This example shows that increasing the proportion of income invested can lead to a significantly larger retirement corpus.

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.