How compound returns can boost your retirement income

Looking forward to a fulfilling retirement is something we all share – and the good news is, your super can help make your dreams a reality. By understanding how super works, especially the power of compound returns, you can make the most of your retirement savings and set yourself up for the lifestyle you want. 

Compound returns – also known as compounding – might sound familiar but, if you don’t know what they are, or aren’t quite sure, don’t worry, you’re not alone.  

According to AMP research, 56% of Australians under 40, and 57% under 50, said that they don’t understand compound returns¹. If you’re in that group, keep reading to find out what they are and why they’re so important.  

Compound returns vs. compound interest: what’s the difference? 

Compound interest is when the interest you earn is added to your balance, so future interest is calculated on an ever-growing amount, which means your money can grow faster over time as interest builds on itself.  

Compound returns, however, while similar to compound interest, are slightly different. Compound returns include compound interest, as well as other things, such as dividends and capital gains.  

We tend to earn compound interest on our bank balances. Compound returns are more often associated with shares, superannuation and other investments.  

How your super investment grows over time 

Your superannuation isn’t simply an account you’re required to put money into, to earn interest over long periods of time. It’s an investment, and as such, the money you put in – and have in – your super, grows more quickly thanks to the returns it makes from investments in shares, properties, cash and more.  

The exact way that your super is invested will depend on a number of factors, such as the type of super you have, who holds your super, how it’s managed, your risk appetite and what you want it to achieve. This is usually dictated by the stage of life you’re currently in, such as whether you’re young, close to retirement age, or somewhere in the middle.  

Regardless, your super is working in the background to make use of compound returns to supercharge its ability to accumulate wealth and grow.  

The power of starting early: give your super more time to grow 

While everyone’s situation, goals and retirement plans will be different, when it comes to making the most of compound returns, the sooner you start, the better. 

Returns accumulate over time through investment, reinvestment and earned dividends, which enable your super to invest, reinvest and earn dividends again, but on more valuable assets and shares, allowing it to grow exponentially. This means that the longer your money is in there, the longer it has to earn and accumulate, and the better your gains will be.  

Put simply, the best time to start growing your super is yesterday. The next best time is today.  

The snowball effect: let your super gather momentum 

When you imagine a snowball growing larger and larger, gathering snow as it rolls down a hill, it’s easy to see how starting early can make a massive difference. A snowball that starts from the peak, will spend more time rolling down the mountain, and will therefore be bigger when it reaches the bottom than one that only starts somewhere in the middle.  

Let’s look at Mia, who is 37 years old, and decides to forgo her usual weekly cafe breakfast – saving $25 each week – and instead, she contributes that $25 (or $1,300 a year) as an after-tax contribution to her super. 

If Mia keeps up this habit from age 37 until she turns 60, she will have contributed a total of $29,900 out of her own pocket over 23 years. Thanks to the power of compound returns and the time she has to let that money grow, this small, consistent effort could snowball her super into approximately $53,776 by age 60.² 

That means Mia’s money has nearly doubled, just by making a simple lifestyle change and letting compound returns do the heavy lifting.  

(Note: This is a simplified example and doesn’t take into account fees, insurance or changes in salary or contribution rates, but it gives you a good idea of how compounding can work for you.) 

The best thing about compound returns: you don’t have to do anything 

One of the most powerful aspects of compound returns is that they work for you automatically. Once your super is invested, the process of earning returns on top of returns happens quietly in the background – no need for constant monitoring or complex investment decisions. This means you don’t need to be an expert investor or spend hours managing your super to take advantage of compounding. As long as your super remains invested, it continues to grow over time, with earnings being reinvested and generating even more growth. 

Small steps you can take to make the most of compound returns 

But there are small things you can do to boost your super even further. 

• Consider salary sacrificing into your super, or making regular, manageable extra contributions to your super, even if it’s just a small amount each pay cycle. You can use AMP’s Salary Sacrifice Calculator to see how this could change your super. 

• You might also want to consolidate multiple super accounts to save on fees. If you do decide to consolidate, make sure you don’t risk losing features and benefits including life and other insurance that may be attached to the account you’re considering closing. 

• Review your investment options to ensure they suit your risk appetite, future goals and stage of life. If you’re an AMP customer, you have access to personal Digital Advice, for no extra fees. 

• Make the most of your fund’s tools and features to see where you could be tuning up your super. You can use AMP's Retirement Simulator to see how much you will have in retirement. 

• Learn more ways to boost your super here.