THIS month, expect to receive a most important document - your annual superannuation statement.
If you're like most Australians, you'll probably give it a cursory look and then throw it in the too hard basket until you've got more time to think about it.
Think again. What you decide to do with that document could have a huge effect on your financial future, especially if you are young.
For starters, let's refresh our minds about the way compounding works. When you invest, the amount you will have at the end of the term depends on the rate you can achieve, and the length of time the money is invested. If the term is short, the rate is of little importance; but if the term is long the rate is critical.
Think about two people both aged 22, who are currently earning $40,000 a year and who have $20,000 in super, all contributed by the employer. Let's assume their salary increases by 4% a year, and the employer contribution remains at 9.5%.
If one person ignored the asset allocation in their fund and left it in 'capital stable' or 'secure', their fund may achieve a return of 4% per annum. At their preservation age, which will be almost certainly be 70 by the time they reach it, their superannuation would be worth just $1.5 million.
If the other person took the time to manage their asset allocation and focused on high growth assets within their super, their fund may well achieve 8% per annum. At age 70 it would be worth $3.6 million. Just managing their affairs to maximise the rate of return may be worth $2.1 million to them when they retire.
If your assets are building up, or you are over 40, you should be taking advice on the kind of assets you should hold in super, but for young people it's a no-brainer: choose the highest growth option that is available.
It is now September. Probably, you are amazed how quickly the year is going by. It's a wake-up call to take urgent action to optimise your superannuation - every year you procrastinate means that compound interest has one less year to work its magic.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com.
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