Why a Small Number Matters So Much ❄️
When it comes to superannuation fees, small percentages can have an outsized impact on your final balance. This is because fees don't just reduce your balance today; they reduce the amount of money that can be invested and earn returns for you tomorrow. This concept is often called "compounding." Fees, unfortunately, compound in reverse, eating away at your potential growth year after year.
This article provides a general illustration of this principle and does not constitute personal financial advice.
A Tale of Two Funds
Let's consider a simple, hypothetical scenario to see the effect. Meet Alex, who is 30 years old and has a $50,000 super balance. We'll look at how Alex's balance might grow over 35 years in two different funds, assuming an average investment return of 7% per year.
- Fund A (Low Fees): Charges total fees of 0.8% per year.
- Fund B (High Fees): Charges total fees of 1.8% per year.
The difference is just 1%. It seems tiny. But let's see what happens.
The Result After 35 Years
After 35 years of growth, the difference is staggering.
- Fund A (0.8% fee): Alex's effective annual return is 6.2% (7% - 0.8%). The final balance would be approximately $411,000.
- Fund B (1.8% fee): Alex's effective annual return is 5.2% (7% - 1.8%). The final balance would be approximately $299,000.
The 1% difference in fees resulted in over $112,000 less for retirement.
This is a simplified example for illustrative purposes only. It does not account for contributions, inflation, or actual market fluctuations and should not be used for making financial decisions.
What Can You Do?
The lesson is clear: fees matter. When you're comparing super funds, performance is important, but the long-term impact of fees can be just as significant. Always check the "Fees and Costs" section of a fund's Product Disclosure Statement (PDS) to understand what you're paying. A fund with slightly lower returns but significantly lower fees could potentially leave you better off in the long run.