16 Jun

THE AMAZING POWER OF COMPOUND INTEREST

Posted at 11:37h

If you were to ask a 25-year-old where their superannuation is invested, at least half of them would have no clue. They probably would not be able to tell you what fund it is in. If they do know the actual fund, try asking them about the portfolio they have within their fund. It is likely by now that you will find at least three-quarters of 25-year-olds have little to no engagement with their superannuation whatsoever. It is understandable though as it is money that they are not able to touch until they are 60 and are likely to be 65 or older by the time that they retire. Why worry about it now?

It is because now is the most important time for them to worry about their super – and the reason behind that is because of the impact of compound interest.

Take as an example Melissa, a 25-year-old that has $20,000 in her superannuation.  The default product that she is invested in is the balanced product, but she also has options to choose more conservative or more aggressive portfolios. The money will still be in her super fund for another 40 years. How important is a small increase in the rate of return to what she already has in her super?

$20,000 invested for 40 years at a rate of return of 5% will equal $140,899.80 in 40 years.  At an inflation rate of 2% that is the equivalent of $63,767 in today’s money. It is still a good result, but how could it be made better? Investing $20,000 for 40 years at 7% would net $299,489 or $135,636 in today’s money.  That is almost double the money that had been initially invested.

Now is a crucial time for everyone, young and old, to consider their superannuation portfolio to ensure that they are always receiving the best return possible. It will be far too late to do so when they hit retirement age after all.