A look at the figures below indicates that a wait of 10 years will require you to set aside an additional Rs 6,400 every month.

ASSUMPTIONS Your current monthly lifestyle works out to be Rs 20,000 The annual rate of inflation is 8% Income is growing annually at 10% The post-tax yield on investments are 10% You have set your retirement age at 55 years After retirement you will invest in fixed income instruments that offer an annual post-tax return of 10% YOU START SAVING AT 30 The same monthly lifestyle will cost you Rs 136,970. Which means that you will need a corpus of Rs 205 lakh (assuming an annual earning at 8%). That translates into a monthly savings of Rs 6,600 growing at 10% annually. YOU START SAVING AT 40 The same monthly lifestyle will cost you Rs 63,000. Which means that you will need a corpus of Rs 95 lakh (assuming an annual earning at 8%). That translates into a monthly savings of Rs 13,000 growing at 10% annually.

Let compounding work to your benefit

Harvey C Knowles III and Damon H Petty in their book 'The Dividend Investor' lucidly bring out this aspect.

"Peter Minuit, Governor of the Dutch West India Company, purchased the island of Manhattan in 1624 from the Manhattan Indians. For this land, he paid $ 24 worth of cloth, beads and trinkets. Many people tout this real estate deal as a disgraceful example of how the European immigrants took advantage of the native Americans.

Minuit is considered to have stolen the property from the native people who didn't have an understanding of the island's real value. Perhaps, he did.

If, however, the Manhattan Indians had invested the proceeds of the land sale in enterprises that appreciated at an average compound rate of 8%, their holdings would be worth $ 75,979,380,000,000 - $ 76 trillion. They would now have had enough money to buy back Manhattan, and then buy with the change Tokyo as well as all of the companies in the S&P500.

But had the Manhattan Indians failed to reinvest just 2% a year, their portfolio would have been worth only about $ 44 billion ($ 43,869,010,000).

Squandering dividends would have cost more than $ 75 trillion."

In case you are finding it difficult to identify with those figures, take a look at the ones reproduced below. With the sum in question being Rs 100,000 and the tenure just five years, check out the difference caused by compounding.

Invest Rs 100,000 in a five-year deposit, with an annual return of 12%, offering the interest half-yearly. Should you decide not to touch the half-yearly interest but keep reinvesting it in the deposit, here's what you will end up with: The principal of Rs 100,000 Interest amounting to Rs 84,573 Rs 184,573 at the end of 5 years At 8% annual inflation, Rs 184,573 is worth Rs 122,000 Should you decide to spend all the interest you keep earning, this is how much you eventually get: The principle of Rs 100,000 Interest amounting to Rs 60,000 Rs 100,000 at the end of 5 years since you withdrew the interest all along At 8% annual inflation, Rs 100,000 is worth Rs 68,000

Lesson to be learnt: The earlier you start, the less you will have to keep aside every month. And the more you earn due to compounding. So, what are you waiting for?

Next: • Getting started