SSIAs: Having spent five years accumulating your SSIA nest egg, spending it straight off would be a big mistake. The average SSIA saver is expected to end up with €15,000-20,000 and is perfectly positioned to reap the benefits of "compounding".

They say that "compounding" is the eighth wonder of the world, and not without good reason. Let's take a look at the following mind teaser.

In the accompanying Table 1, Investor A starts to save for retirement at age 25 and puts €2,000 into his investment programme each year until he is aged 32. That's eight years and an investment of €16,000.

He does not contribute anything further to his investment programme but we'll assume he gets a theoretical return of 10 per cent each year on his investment until he retires at age 65.

Now compare him with Investor B who starts his investment plan later at the age of 33, just when Investor A is finished contributing to his plan. However, Investor B contributes €2,000 into his investment programme each year until he is aged 65 and gets the same theoretical return of 10 per cent a year. Over 33 years, Investor B has put €66,000 into his investment plan.

Now ask yourself who has the largest lump sum saved at age 65? Surprisingly, even though Investor B has contributed €66,000 to his programme compared to only €16,000 by Investor A, it is Investor A who walks away with the bigger lump sum.

The answer to the riddle is that by the time Investor A has stopped contributing to his investment programme at age 32, he has already compounded his monies to €25,159. A 10 per cent return on this lump sum in the following year is €2,516 and already above the €2,000 that Investor B has just started to contribute in his investment programme. Investor B simply can not catch up to Investor A in the time given. Now that is the power of compounding!

As the majority of SSIA holders is expected to end up with a lump sum of between €15,000 and €20,000, the above example is very relevant.

The above 10 per cent annual return is, of course, theoretical. In Table 2, we show the real returns, ie net of inflation, from both cash deposits and the stock markets over the 36-year period from 1970 to 2005 inclusive. We have taken the average of the real returns in Ireland, UK, US and Europe over that time period.

The saver should always get a real return over and above inflation and on average over this time period one can point to a 2 per cent real return a year for cash deposit savers.

The stock markets can be expected to generate higher real returns in the medium to long term, although not in each and every year. The reason is well understood.

Businesses take risk and must, in aggregate at least, deliver a higher return for that risk.

Over the same 36-year period, the real returns from equities over and above inflation averaged over 6 per cent a year.

Of course, stock markets do not go up in a straight line and the volatility of stock market returns is what unnerves many. However, as we demonstrated in last week's article, regular investing deals effectively with volatility and the equity SSIA accounts can truly be said to have conquered stock market volatility.

Looking forward then, assuming valuations are not overstretched at this starting point, with inflation in the euro zone of around 2.5-3.0 per cent currently, equity market returns of 8-9 per cent a year from here would appear to be a reasonable target.

With a starting point of €20,000 and a commitment to continue saving that €250 a month, many in the Republic of Ireland have the chance to shoot for a lump sum of €80,000-€100,000 on a 10-year view from here.

So think twice before you kick the SSIA habit.

This series of articles is being written by Rory Gillen, who manages the Select GV Equity Fund in Merrion Capital and is the course director for the stock market training company Invest Like the Best (www.investlikethebest.com). A copy of all six articles can be obtained at the end of the series by e-mailing r.gillen@iltb.ie