a popular idiom, and appears appropriate to the retirement savings debate. Clearly, it would be foolish to start saving for retirement a year before you plan to retire - you cannot hope to save enough money in one year to sustain you for the rest of your life. However, I believe that it is never too late to start saving, even though starting as soon as possible is ideal. Those who favour an early start can study this example:

Mr X starts saving Rs. 10,000 each year from age 25. Assuming an investment return of 10% per annum, he will have an accumulated fund of Rs. 48.7 lakh by age 65. Mr Y starts saving Rs. 10,000 each year from the time he is 40. Assuming returns of 10% per annum, he will have an accumulated fund of Rs. 10.8 lakh by age 65. Mr Z starts saving Rs. 10,000 each year when he is 55. Assuming an investment return of 10% per annum, he will have an accumulated fund of Rs. 1.8 lakh by the time he turns 65.

The message is clear - an early start makes all the difference. However,let us challenge the assumptions: Retirement savings are assumed to remain level each year (Rs. 10,000), in an environment in which the investment return is assumed to be 10% per annum. Clearly, we are looking at inflation of about 7% per annum, so it would be more reasonable to assume that the amount saved each year would grow in line with inflation.

The affordability of a contribution of Rs. 10,000 at age 25 (when income is low, and living expenses eat up most of the salary) is very different to the affordability of . 10,000 at age 55 (when income is generally higher, and living expenses are low now that children are self-supporting).

The average 55-year-old can save 50% of his take-home pay, as easily as the average 25-year-old can afford to save 5% of his takehome pay. In fact, even if the 25-year-old could save 5% of his take-home pay, the chances are he would be keep it aside for setting up his own home or buying his own transport. Retirement saving will not be given priority. In my experience, Mr Average will see his take-home pay increase by 10% more than inflation between age 25 and 35 and by 5% more than inflation between age 35 and 45 (career advancement takes place at younger ages). Thereafter, his income will grow in line with inflation. On the other hand, his expenses will absorb 95% of his take home pay between age 25 and 50 (due to the ever increasing cost of raising a family), and just 50% of his take home pay between 50 and 65 (once children leave home and the housing loan is paid off). This means that Mr Average can afford to save 5% of his take home pay between age 25 and 50, and 50% of his take home pay between age 50 and 65.

So let us re-look at the results. Assuming that in real terms, Mr X has take-home pay of Rs. 1.2 lakh at age 25 (in 2011) increasing as outlined above (real increases over and above inflation adjustments), and that he saves 5% initially (increasing to 50% at age 50), he will have an accumulated fund of Rs. 8.4 crore. Taking out the effect of inflation, the real value of his retirement savings is Rs. 60 lakh (as per . value in 2011).

Mr Y starts saving at age 40 (in 2026), and based on the same assumptions, will have an accumulated fund of Rs. 7.8 crore. Taking out the effect of inflation, the real value of his retirement savings is Rs. 56 lakh. Mr Z starts saving at age 55 (in 2041), and based on the same assumptions, will have an accumulated fund of Rs. 4.4 crore. Taking out the effect of inflation, the real value of his retirement savings is Rs. 32 lakh.

The gap between Mr X and Mr Y is now very small, because the amount available for retirement saving between age 25 and 40 is negligible. The gap between Mr Y and Mr Z is relatively bigger, because Mr Z is losing out significantly between age 50 and 55. The numbers are merely an example, and would not be applicable to everyone. However, they hopefully help you to understand the impact of inflation and savings ratio on retirement savings.

What are the risks of not starting to save for retirement at an early age?

*You may be unable to continue working to age 65, because of health problems.

*You may be retired early by your employer who is looking for someone younger and cheaper to fill your role.

*Your family may have medical costs that eat into your takehome pay.

*Your children may remain dependent for much longer.

All of these risks could reduce your retirement savings. So start saving as soon as possible, but don't despair if you haven't done much by the time your children start working. If you save most of your surplus income after your children become self-sufficient you can recover most of the lost ground.