Compound returns: the superpower of superannuation

We all know super is about saving for retirement. But the money you and your employer put in your account each pay is only one way your super grows.

The real superpower behind super is compound returns.

What are compound returns?

When it comes to your retirement savings, the money you and your employer put into super doesn't sit around doing nothing until you retire. Instead, we put it to work and invest it to try and earn returns.

Spirit Super is a unitised super fund. This means when you invest with us, you're actually buying units in an investment option (or several options). Each investment option is made up of different asset types such as shares, cash, bonds, property, and infrastructure etc.

Your super balance is calculated based on how many units you own in an investment option and its unit price, which is calculated daily.

If your chosen investment option (or options) earns a return, we reinvest those returns back into the fund to try and earn more returns. This increases the value and by extension the unit price for your investment option, which in turn increases your super balance.

Now your super is earning returns on returns — it’s compounding.

Over time, this cycle of earning and reinvesting returns supercharges your super, helping it grow faster as your balance gets bigger.

Of course, sometimes investment options also lose value, so your balance may go down from time to time. However, because super is a long-term investment, generally these short-term losses are outweighed by long-term gains.

Making compound returns work for you

The secret to making compound returns work for your super is to invest early. The more you put into super early in your career, the more time your super has to grow (to compound).

For example, if you invested $1,000 over 20 years with 8% compound returns, you would have $4,661. But if you invested the same amount with the same rate over 40 years, you would have $21,725¹.

Think of it like a snowball rolling down a mountain.

As the snowball rolls, it collects snow and grows bigger. The bigger it gets, the more snow it gathers, and the faster it rolls. This momentum gets carried forward, and by the time your little snowball gets to the bottom of the mountain, it has grown into a giant boulder.

Of course, this assumes you launch your snowball from the top of the mountain. If you start halfway down, your snowball won't have as much time to gather speed and grow. This means it won't reach its full potential before it gets to the bottom.

So, the trick is to get the ball rolling early and keep adding to it when you can. This all adds up to more money for you in retirement.

¹ Figures calculated using MoneySmart’s Compound interest calculator on 23 November 2021.

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