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How Compounding Works Wonders for Your Super

Most of us want to secure as big a pot of money as we can for retirement. The trick is to make what cash we put aside over our lifetimes work as hard as possible. It needs to grow and grow for the best results.

You may find your Launceston financial planner refers to compounding as one of the great wonders of investing. Superannuation compounding is no exception. So, what exactly is compound growth in super? Read on to find out.

What Is Compounding?

Let’s say you have one dollar, and you get an annual rate of ten cents interest by investing it. After year one, you would have $1,10. In the second year, you would earn interest on your original dollar and, crucially, on the 10 cents of interest you had earned as well.

There’s a snowball effect on all subsequent years as you continue to earn interest on your original dollar and the interest you’ve accumulated.

Imagine a snowball rolling down the hill. It may begin small, but it will continue to grow the further it rolls as it adds more and more layers. Compound growth in super works similarly. In terms of your super, compounding equates to all the investment returns you generate on the returns you’ve already made.

How Does Compounding Growth In Super Work?

You’ll earn compound returns on your total account balance. This happens through the daily crediting rate. The money you earn continues to grow in your investment balance and gets constantly invested by your fund. The process repeatedly happens so that your super grows over your lifetime. We call this compounding.

Your balance, of course, also grows through any contributions you make, either through your employer or voluntarily. The returns on your investments will carry on growing over the years. These additional contributions will boost your balance, compounding over time.

Your super doesn’t simply sit in an account waiting for you to retire. Your super fund makes it work hard for you, investing it in all kinds of assets to grow a healthy balance for when you’re ready to stop working.

As investments grow, you get a return, and every time that happens, your balance increases. That allows your retirement savings to grow over time.

It’s worth remembering, however, that investments do not come without risk. They may drop in value or not meet the expectations you had. Although super balances have increased over the long term, there can be moments of volatility in the investment markets causing negative returns.

How Young is Too Young When Investing?

It’s never too early or too late to start thinking about your retirement and how you’ll fund it. The length of time you have for your super fund to grow will play into your return, however. In a sense, it’s more about the time in the market rather than getting the timing of the market right.

The longer you can leave your investments, the more time you have to ride out market volatility. Annual investment returns are never the same. Sometimes, they can be higher. At other times, they can be lower or even in negative territory. Markets tend to move through cycles of volatility and stability.

Some investments are riskier than others but can be tempting because they have the potential for lucrative returns. Shares are a classic example of this. That’s why it’s often best to go for diversity and keep your retirement savings in a variety of asset classes. By doing that, you’re spreading the risk.

There is generally an expectation of higher returns over a long-term period. The money in your super could be under lock and key for 40 years or more. How long will depend on how old you are.

The Benefits of Compounding Early

The sooner you start saving, the longer you will have to accumulate compound returns and see them grow. In our twenties, retirement can seem so far away that we don’t see the logic of making it a priority. But contributing to your super when you’re just starting in the workforce could make a massive difference to your final super balance.

Apart from employer contributions, there are other ways you can add to your super balance. All these could play into compound growth in super. Regardless of your age or circumstances, you should discuss these with a Launceston financial planner, like PAC Financial.

You could, for example:

  • Make a before-tax contribution to your super by sacrificing part of your pre-tax salary
  • Make after-tax contributions from your take-home pay
  • Take advantage of government contributions if you’re a low or middle-income earner

There are contribution caps that may apply, along with tax issues. Salary sacrifice can also have an impact on certain Government benefits. These are yet more good reasons to talk to a financial planner about superannuation compounding.

Look Forward to the Best Possible Retirement

You can invest your super in a variety of asset classes that’ll grow your retirement savings over time. For instance, an option could be to invest in one or all of the following:

  • Shares and private equity
  • Property and infrastructure
  • Fixed interest ventures

Diversification mitigates risk and could limit the impact of market volatility. You can help to grow your retirement savings and make the most of the compounding effect by taking these simple steps:

  • Shop around: compare funds & investments
  • Consolidate your super into one rather than having multiple super accounts
  • Make contributions to your super on top of those your employer makes

Remember that even small contributions when you’re starting your career can make a massive difference to your retirement pot. Australian Superannuation is the envy of many countries across the world, so it’s well worth taking a keen interest in how yours is tracking.

Talk to Your Launceston Financial Planner

If you avoid planning for your retirement, it could prove costly. Even if you’re mid-way or late into your career, there’s still a lot you can do to ensure you’ll live your later years as comfortably as possible.

It’s always worth discussing compound growth in super with your financial planner. Contact one of the friendly team at PAC Financial, and we’ll be able to run through all the best possible options for you and your circumstances.

 

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