Check out how compounding can benefit your retirement plans

In an interview to CNBC-TV18, Harshvardhan Roongta, Roongta Securities shared his reading and outlook on the power and benefits of compounding from a financial planning perspective.

"The secret of financially happy living is to plan for all the known events in life and to make provisions for all the unknown events in life," he explained. Below is the edited ript of his interview on CNBC-TV18 Q: Warren Buffett has used the power of compounding to a dramatic effect in getting value for his investments to grow at spectacular rates – now that is legend for the stock market. Yet, for a large majority of investors this benefit of compounding is not something they have taken advantage off – can you give us the argument of compounding to convince our viewers? A: The retail investors have still not understood the power and the benefits of compounding. From a financial planning perspective, we all have goals in life. Some of us have defined them and some have not defined them. The secret of financially happy living is to plan for all the known events in life and to make provisions for all the unknown events in life. One of the known events which every individual is going to require to take care of is, retirement. Whether one is salaried, a business person or a profession, it could be any of the occupation; retirement is something that somebody needs to plan for. This is a planned event in life. Planning for it would essentially mean that one needs to start thinking about doing something for it and actually do something for it much in advance. Let us take up retirement as an example and to give one actual example – if a person’s age is 30 years and wants to plan for retirement at 60 years; if he begins to invest just Rs 1,000 into long-term equity assets, which we will assume has a rate of 14 percent, the corpus he will accumulate at the age of 60 years will be Rs 54 lakhs. If this person was to delay his investments by just 5 years, so instead of 30 years he begins to invest at the age of 35 years, the corpus at 60 years at the same rate will become Rs 26.5 lakhs. However, just by delaying it by five years he has actually deprived himself of a corpus which is double than what he would otherwise have accumulated with that small sum of Rs 1,000. This is one of the basic examples of power of compounding. Five years multiplied by Rs 1,000 is what he has not done, against which he is losing out the corpus which is half of what he would otherwise generated. This is specifically monetary calculation. There are other certain benefits if one plans and start early. One of it is, the one has to invest much lesser so, the same person if he has to accumulate Rs 54 lakhs now has to invest Rs 2,000 for the next 25 years from 35 to 60 years.