Posted on 08/02/2021
While compound interest might not sound like a particularly exciting topic, the idea of seeing your money grow over time certainly is! So why don’t more of us take note?
Opel Nelson, Associate Financial Planner at Statewide Super, says that your superannuation is a great example of how compound interest can work in the long term – particularly if you make additional contributions throughout your lifetime.
“Making small contributions to your super regularly and/or early can have a big impact over time,” she says.
For illustrative purposes only. These forecasts are based on the following assumptions: Starting salary of $50,000 increasing with a CPI of 2.5% per annum from the ages of 20 to 65. Fees are based on Indirect Cost Ration of 0.7% per annum with $78 per annum member fee. Salary Sacrifice contributions of $100 per month (not indexed in-line with salary increases). A Super Guarantee contributions rate of 9.5% and increasing to 12% as currently legislated is used for this calculation. Investment return of 7.13% per annum. They are predictive in character, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from results ultimately achieved. Statewide Super cannot guarantee returns year on year. Past performance is not a reliable indicator of future performance.
“Take four women: Kelly, Anna, Rebecca and Kylie, who all start their working lives on a salary of $50,000” Opel says.
“Kelly hasn't made any additional contributions to super. Anna started early, contributing $100 a month from the age of 20 before stopping at age 35.
“Rebecca started a little bit later, also contributing $100 a month from the age of 35, for double the time as Anna through to her retirement at 65. Kylie on the other-hand has contributed the whole way through.”
As Kylie has contributed throughout her working life from age 20 to age 65, she ends up with the most in her super.
Then, while many might think that Rebecca would end up with more in her superannuation than Anna (because she contributes more) it’s actually Anna who has made the biggest impact on her super, by making contributions earlier.
This is due to the benefits of compound interest.
“Compound interest helps your money grow faster because interest is calculated on the accumulated interest over time as well as your original principal,” Opel says.
“Compounding can create a snowball effect, as the original investments, plus the income earned from those investments grow together.”
“Ultimately though, whether they started early or late, making small contributions throughout their working lives at a time that suited them resulted in a notable difference in each of their retirement savings.”
So what can you do?
Consider making small additional contributions to your super.
“Even small amounts made regularly over time can have a noticeable impact on your retirement savings,” Opel says.
“Of course it's important to consider your personal financial situation to determine which option may be the most appropriate for you.”
To learn more about compound interest and the impact of making extra contributions to your superannuation, contact Statewide Super today to speak with one of our financial planners.*