To live comfortably in retirement, the Association of Super Funds of Australia says you need to retire with a super balance of at least $545,000 if you're single or $640,000 for couples. This would be a very difficult amount to save if it weren't for compound growth.
Thanks to compound growth the more your super grows, the more it will continue to grow over time.
Compound growth is the secret ingredient in your super fund. Without it, you'd retire with a much smaller super balance.
Super funds earn investment returns which benefit from compound growth. This means the money you earn on your super investments is then reinvested (rather than being withdrawn). Because the money is reinvested with the rest of your super balance, you then earn returns on your returns.
Compound growth is a powerful tool because it creates momentum for more growth (then more and more). The compound growth principle says that the investment's earnings will be reinvested and therefore capable of earning further returns.
Let's take a look at a simple example. If growth was not compounded, a $10,000 investment at 10% p.a. growth over 10 years would result in an end balance of $20,000. Each year your initial $10,000 investment would earn a return of $1,000 – but this return isn't reinvested the following year.
Now let's look at the same example using compound growth instead. After the first year, your return of $1,000 is reinvested and added to your initial investment of $10,000. So for the following year, you'll instead be earning a 10% return on $11,000. After 10 years your investment would be worth $25,937 – an extra $5,937 earned through compounding.
When reading about compound growth, you might hear the term compound annual growth rate, or CAGR for short. This is a way of calculating how much an investment has returned on average each year over a period of time. Super funds use it to show their past performance returns.
Let's take a look at Australia's largest super fund, AustralianSuper Balanced, as an example. Over the 10 years to June 2022 the fund achieved a return of 9.34% p.a. However, this doesn't mean the fund returned exactly 9.34% each year over the last decade.
Instead, some years it may have returned 16% while other years it only returned 3%. However, when looking at the total return over the 10-year period, it's calculated to be 9.34% per year on average.
It's important to note that this doesn't mean the fund will continue to return 9.34% per year going forward. The CAGR is a historical average return, not a fixed future return.
Superannuation growth comes from the money earned on the investments in your portfolio and the reinvestment of that money. Factors that affect this growth boil down to the type of fund your investments are in and the fees you're being charged.
Type of super fund
Superannuation fees
Your contributions
| Response | |
|---|---|
| 10 | 10.54% |
| 5 | 8.74% |
| 20 | 8.32% |
| 15 | 6.52% |
| 2 | 6.38% |
| 1 | 6.1% |
| 3 | 5.41% |
| 6 | 4.58% |
| 7 | 4.58% |
| 30 | 4.44% |
| 25 | 4.16% |
| 4 | 3.88% |
| 12 | 3.19% |
| 40 | 3.05% |
| 8 | 3.05% |
| 13 | 1.8% |
| 18 | 1.66% |
| 22 | 1.53% |
| 35 | 1.39% |
| 9 | 1.25% |
| 11 | 1.11% |
| 23 | 1.11% |
| 14 | 0.83% |
| 17 | 0.83% |
| 28 | 0.83% |
| 29 | 0.83% |
| 16 | 0.69% |
| 26 | 0.55% |
| 21 | 0.42% |
| 24 | 0.42% |
| 19 | 0.28% |
| 27 | 0.28% |
| 32 | 0.28% |
| 33 | 0.28% |
| 31 | 0.14% |
| 34 | 0.14% |
| 36 | 0.14% |
| 37 | 0.14% |
| 39 | 0.14% |
Super growth is built on compound growth, and this means super members don't need to do anything to have compound growth. All super funds are experiencing some form of compound growth.
If you want more growth from your super fund there are a few things you can do:
Unless indicated otherwise, the information in the table is based on data provided by SuperRatings Pty Limited ABN 95 100 192 283, Australian Financial Services Licence 311880.
*Past performance data and fee data is for the period ending Mar 2024
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