There’s this magical little thing called compounding returns. It’s part of investing and is working away quietly in the background without you even realising it. Albert Einstein even described compounding returns as the ‘eighth wonder of the world’.
So, what are compounding returns?
At first glance, it may sound like hocus pocus, but compounding returns are an important part of investing.
Put simply, compounding returns are the returns that are generated on investment earnings that have already been earned.
Why are they so magical?
Within super, previous investment earnings are part of your account balance so your super account benefits from compounding. And because you cannot access your super until later in life, you can benefit from many years of compounding returns. The key is to be invested in the optimum investment options for your age and risk profile.
One thing to point out is that, in any market cycle, you will experience negative returns from time to time, which will negatively impact your account balance (and the subsequent impact of compounding returns).
It’s not an illusion – here’s how it works
Your super balance grows each year, thanks to your employer’s contributions and any voluntary contributions you make.
Your super is an investment, with each investment option made up of ‘units’. The value of a unit is known as the ‘unit price’ and represents the value of the assets (e.g. shares, property, bonds etc) underlying each investment option.
Each day, your account will receive investment earnings and, when combined with contributions coming into your account, really snowballs over time.
The longer your investment timeframe, the better
Where super is concerned, compounding returns are a game-changer for anyone who has a longer investment timeframe because there’s more time to let compounding returns work its magic.
The impact of compounding on your super account depends on the long-term returns from your investments, so it’s crucial that your investment strategy is right for you.
Other ways to ‘magically’ grow your super
- Salary sacrifice to boost your super – when you salary sacrifice, you are giving up (or ‘sacrificing’) a portion of your before-tax salary, directing it to your super account instead of it being paid to you. It can be particularly tax-effective way of contributing to super if your marginal tax rate (plus the Medicare levy) is greater than the 15% contributions tax rate applying to salary sacrifice contributions.
- Make after-tax contributions whenever possible – even the smallest voluntary contribution to your super can make a big difference in the long run. See for yourself – try our Retirement Income Calculator to see how making small contributions can magically boost your super.
Don’t let your super perform a ‘disappearing act’
If you’ve worked in different jobs and industries, there’s a good chance that you may have super in more than one account. And the biggest risk of having several accounts is that you lose track of them.
When it comes to super, one account is the way to go. It’s easier to manage and have oversight over your money, and you save on fees.
Call us if you have any questions about investments
If you don’t feel confident working out your investment strategy and making decisions about your super investment, we’re here to help. Simply call 1800 757 607 to speak with a financial planner.
The information on this page has been issued by Maritime Financial Services Pty Limited (MFS). It contains general information that doesn’t take into account your individual objectives, financial situation or needs. It’s important to consider how appropriate this general information is in relation to your situation before making an investment decision. We recommend that you seek financial advice before making any decisions regarding your super or investments. The information on this page is current at the time of publishing.