14 Mar Compound interest and superannuation … how does it fit?
Superannuation is not the investment.. when shall we learn.
In many ways we are most interested in a disinteresting topic or maybe it is the other way around. I am always interested when I hear of people praising/complaining about their super. My super performed well or performed poorly or the super company drew out fees or did not. There is still a lot to be learned about super for the general community. Joe Hockey is in the media as I write this talking about accessing superannuation early for first home owners and opinions are firing in all directions. I thought it worthwhile to look at super another way and work some numbers. Superannuation is only a tax vehicle, it is not an investment. It is not a bank or a building or a share or an ingot of gold. Its a tax structure, that’s all. Its up to you how you invest the money that sits in that tax structure. I’ll say it again, it is up to you how you invest the money that sits in that tax structure.
Superannuation or investments lets look at some numbers….
Say the long term average of the Aussie stock market is 9.9%. You starting investing when you were 20, first job out of university and started with $1,000 in super and added $100 a month until you were 60. Compound interest (no allowance for fees or taxes to keep it simple) on this would make it worth $665K. In today’s dollars, worth about $203K. Ok, go to $200 a month and $1.278m is the end figure. So lets say you want to retire on $100,000 in today’s dollars in 20 years time. That is $180K indexed up at 3% CPI in 20 years so you need $3.6m at 5% return to achieve your income needs. Sounds high, well the truth is it probably would not be if you start early and have a plan. Now if you notice I did not refer to superannuation in these calculations, but this is what superannuation is. It is a long term investment vehicle option and the best tax effective option.
So a couple of points..
1. Compound interest is powerful in both superannuation and non super investments but in superannuation, a large part of the sting of capital gains tax is removed. It was Albert Einstein who said;
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
2. Time in the market is more important than timing the market. That is, how much time you are invested as opposed to trying to pick the highs and lows.
3. Being able to add regularly to your investment be it superannuation or otherwise shall even out your return over the long term.
4. The earlier you start investing the greater the chance of getting where you want to be whether it be superannuation or otherwise.
Plan it, design it and put it into practice. Talk to a financial adviser around compound interest and getting the most out of your superannuation.