Albert Einstein is reputed to have said, 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it'.
In simple terms compound growth is leaving your investment for a period of time and re-investing the returns back into the investment – elegantly simple in theory – hard in practice. So how do most Australians achieve this compound growth – superannuation (super). Most super funds harness the power of compound growth to increase the members balances over time. However, there are detractors that may be reducing the amount being re-invested back into your balance. In most of the discussions below, we assume a balance of $100,000.
The most obvious one is fees. For every 1% in fees, you pay you are taking about $1,000 of your returns from being re-invested. The fees may not sound like much, however, considering the reduced compound growth the fees can generate the loss could be in the $100,000’s of thousands.
Again, most funds have a mandate to provide their members with some insurance cover. What members need to be vigilant of is the cost of the insurances, especially as members age their premiums increase. If you earn $80,000 and your employer contributes $8,000 into your super but you pay $2,000 for insurance premiums you have reduced your contributions to $6,000 per year - the impact of this is quite drastic if insurance premiums are allowed to run upwards reducing money re-invested.
Some years ago super funds were mandated to clearly articulate their fees and not hide their costs under pseudonyms. This has resulted in most funds becoming transparent in their reporting of fees. However, at times you may not realise but some funds still charge fees every time you contribute or re-balance how your money is invested. As these are usually percentage based your $8,000 in contributions may reduce to $7,200 if the fund applies a 1% fee.
You will note that your employer must on your payslip provide the most recent contribution and year to date contributions to your super. That does not mean that they have paid the money. Quite often we see clients who are missing super payments from employers. With recent changes to the reporting of wages employers are more closely scrutinised however, if you feel that the amounts on your payslip do not match your super statement it may be time to investigate – the term for not making contributions is ‘wage theft’ because that is exactly what the employer is doing to their employee but not paying their super.
The largest detractor on compound growth is the returns generated by your fund in the various options they provide. In simple terms a 5% return versus 8% runs means the difference between either $5,000 or $8,000 re-invested back into your balance. Re-investing that additional money over your working life is likely to result in a much higher balance. Care needs to be taken though to understand the investment strategy and its fees on your portfolio – if you are up all night looking at your superannuation balance then chances are you are not in the right investment strategy.
As your next super statement comes around at the start of the financial year take 2 minutes to have a look and understand whether you are harnessing the eighth wonder – if you cannot be bothered give us a call.