When it comes to your superannuation, every little bit counts. You might not think that a 1% difference in returns would make a huge impact, but over the long term, it can add up to a staggering difference—potentially even a million dollars or more. Let’s dive into how this works and why you should care about that extra 1%.
The Scenario: A 25-Year-Old with $50,000 in Super
Let’s imagine a 25-year-old with $50,000 already saved in superannuation and an annual salary of $100,000. For simplicity, we’ll assume this person continues to work until they retire at age 65, with their employer contributing 12% of their salary to super each year.
We’ll compare three different superannuation strategies:
1. Industry Balanced Default Fund: Long-term average return of 8%.
2. High-Growth Fund: Long-term average return of 9%.
3. Leveraged Portfolio: Long-term average return of 10%.
The Numbers: How 1% Makes a Difference
Over a 40-year working life, even a small difference in the annual return rate can have a massive impact on the final super balance.
Industry Balanced Default Fund (8%):
Final Super Balance: $2,165,000
High-Growth Fund (9%):
Final Super Balance: $2,725,000
Difference from Standard Fund: +$560,000
Leveraged Portfolio (10%):
Final Super Balance: $3,427,000
Difference from Standard Fund: +$1,262,000
Difference from High-Growth Fund: +$702,000
As you can see, that extra 1% return from 8% to 9% results in an additional $560,000 by retirement. An additional 1% on top of that (from 9% to 10%) brings the total difference to a whopping $1,262,000 compared to the standard industry fund. That’s the power of compound interest in action.
How Can You Achieve That Extra 1%?
Achieving an extra 1% return isn’t always easy, but it’s possible through various strategies:
1. Choosing the Right Investment Option:
Opting for a high-growth or leveraged portfolio, like the ones in the example, can potentially deliver higher returns. However, it’s important to remember that with higher returns comes higher risk. You need to weigh the potential benefits against your risk tolerance and long-term goals.
2. Making Additional Contributions:
Boosting your super by making extra contributions, even if they’re small, can have a big impact. By contributing a little more regularly, you’re not just adding to your balance—you’re also giving that money more time to grow, which can effectively increase your overall return.
3. Covering Insurance Fees with Extra Contributions:
Many people don’t realise that insurance fees can eat into their super balance. By making additional contributions to cover these fees, you ensure that more of your money stays invested and growing, rather than being chipped away by costs.
4. Tax-Effective Strategies:
Using salary sacrifice or other tax-effective strategies can also help your super grow faster. By reducing your taxable income and increasing your super contributions, you’re effectively boosting your long-term returns.
The Importance of Professional Advice
While it’s tempting to chase higher returns, it’s crucial to remember that higher returns often come with higher risk. Before making any changes to your superannuation strategy, it’s essential to seek professional financial advice. A financial planner can help you understand the potential risks and rewards and tailor a strategy that aligns with your individual goals and circumstances.
Conclusion: The Power of 1%
A 1% difference might seem small in the short term, but over the decades, it can make a world of difference. Whether it’s through smarter investment choices, additional contributions, or effective tax strategies, finding that extra 1% can potentially add a million dollars or more to your retirement savings.
Don’t underestimate the power of small changes—when it comes to your superannuation, every little bit counts. And with the right advice and strategy, you can make sure those bits add up to something truly significant.
