How your super keeps growing: The power of compounding explained

First things first, what is compounding and why does it matter for super?

Simply put, compounding happens when your investment earns returns and those returns are reflected in your account. Your higher account balance can then go on and earn more investment returns. This ‘snowball’ effect helps turn small gains into something much bigger over time.

So, how does compounding work in practice?

Let’s say you start with $10,000 in your super. If it earns a 6% return in a year (after costs and fees), that’s $600 in earnings. Since money in super is designed to stay in super for many years, it adds to your total balance which continues to be invested.

In the next year, if your balance of $10,600 earned a further 6% return, the balance (less costs and fees) would then grow to $11,236. This is because the 6% return applies to the entire $10,600 – not just the original $10,000. Over decades, this effect can significantly increase the growth of your balance.

This is why you’ll often hear: ‘It’s not about timing the market, but about time in the market.’ Time plays an important role in investing. The earlier you begin and the longer you stay invested, the more opportunity compounding has to work. Even small amounts can grow considerably over 20 or 30 years.

Members may be wondering if compounding happens automatically.

Yes, it does. There’s nothing members need to do to switch on or activate compounding. As returns are added to your account over time, your total balance can go on to earn more returns. It’s one of the benefits of super: your money is designed to grow over the long-term.

What role do investment returns play?

The value of your investment returns varies from year to year. Positive periods strengthen the compounding effect as they lift your balance, which can then earn further returns.

In years where there is a negative return (which can happen from time to time) the value of your investment balance may go down. In those years, compounding takes a little break until markets recover.

Importantly, downturns aren’t ‘locked in’ unless you switch options or withdraw funds, and markets can recover over time – which is why staying focused on the long-term can help.

How can members make the most of compounding?

• Stay focused on the long term. Super is designed to support long‑term goals, so short‑term ups and downs are only part of the journey and shouldn’t distract you from the bigger picture.

• Explore scenarios. To see how making extra contributions today could influence your future retirement income, try the Super projection calculator.

• Know your options. If you’re unsure which investment option suits your needs, a financial planner can provide personalised advice based on your investment strategy.