Compounding is one element which can help your super grow. Understand the basic concept and see how the power of compound returns can help boost your balance over the long term.
Compounding is an important part of investing. In fact, it’s often referred to as one of the great wonders of investing. In relation to your super, put simply, compounding is the investment returns generated on the returns you’ve already earned.
So, what is compounding?
Picture this: A snowball rolling down a hill; it may start small, but it grows the longer it rolls. That’s because it’s adding layer after layer. The snowball represents your balance, and the layers represent the compound returns.
Explore how compounding gives your super a boost.
How compound returns work with your super
Like the snowball, your super balance grows too.
In the context of super, compound returns are earned on your entire account balance, through the daily crediting rate.
Any money earned grows your investment balance and continues to be invested by your fund. The process occurs repeatedly, continually accumulating over your lifetime, i.e. compounding.
Your balance will also grow through any contributions put in, either via your employer as part of the Superannuation Guarantee, or by you through voluntary contributions. The returns on your returns also accumulate over time. These additional contributions increase your balance and will grow and compound as additional returns are earned.
Your super is an important investment – and it’s yours
Your super isn’t money that just sits in your account waiting for you to retire. Your super fund puts it work, investing it in various assets with the aim of growing your balance, ready for your retirement.
By investing the money, it gives it the best chance of growing. When investments grow, you get a return – money into your account. Every time you get an investment return, it increases your balance enabling your retirement savings to grow over time.
Compound returns and investing for the long-term
Time is your best friend when investing. The longer you invest, the more time you have to ride out market ups and downs. Investment returns aren’t the same every year – some years they’re higher and other years they’re lower. When returns go up and down a lot, it’s called ‘volatility’, and markets move through ‘cycles’ of stability and volatility.
Typically, the investments that have the potential for the highest rates of return, such as shares, also have highest levels of volatility. This is why it can be beneficial to diversify your retirement savings over a variety of asset classes that can reduce volatility and offer long-term growth potential.
Investing over a longer timeframe is usually done with the expectation of higher returns. Given the money put into your super could be ‘locked away’ for 40 years or more (depending on how young you were when you started working), it makes sense that it doesn’t just sit there doing nothing; it should be put to work (invested) to give it the best chance of growing over this long-term timeframe.
Start compounding early to have biggest impact on your retirement savings
Using the snowball analogy mentioned above, the earlier you can get the ball rolling the longer it will have to accumulate compound returns and grow. Adding to your super in your 20s could make a very big difference to your final super balance.
There are plenty of ways, aside from employer contributions, you can add to your super balance today to help achieve the retirement lifestyle you want down the road. You can make a before-tax contribution to your super by sacrificing part of your pre-tax salary. This could reduce the amount of tax you pay if you pay more than 15% tax on your salary.
You can also make after-tax contributions from your take-home pay. Plus, if you’re an eligible low-income or middle income earner, the government could match your contribution, up to a maximum of $500.
Before adding to your super, consider your financial circumstances, contribution caps that may apply, and tax issues. Salary sacrifice may affect some Government benefits and employee benefits. Consider getting financial advice before deciding what’s right for you.
Build your best possible retirement
Your super can be invested in a range of asset classes to grow your retirement savings over time. For example, a diversified investment option, such as AustralianSuper’s Balanced option, may invest in a variety of asset classes including shares, private equity, property, infrastructure, fixed interest and cash to provide the opportunity for long-term growth and diversification to limit the impact of market downturns.
You can help grow your retirement savings and maximise the compounding effect by taking a few simple steps:
- Compare funds and investment choices to make sure you’re with the best super fund for your needs.
- Consolidate your super. If you’ve ever changed your name, address or job, you may have multiple super accounts. That means you could be paying more than one set of fees. Consider consolidating them into one account to save.
- Contribute to your super^, on top of your super guarantee employer contributions. Small contributions to your super early on in your career can make a big difference to the amount of money you end up with in retirement.
Super might be the biggest financial investment you have in your lifetime, after a house. So it makes sense to be interested in how it’s tracking.
^ Before adding to your super, consider your financial circumstances, contribution caps that may apply, and tax issues.
* Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.
This information may be general financial advice which doesn’t take into account your personal objectives, situation or needs. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement. A Target Market Determination (TMD) is a document that outlines the target market a product has been designed for. Find the TMDs at australiansuper.com/tmd. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.