As a Financial Advisor, I could quickly tell a client how much money their current retirement savings would be worth at retirement. I did not use a calculator, spreadsheet, or computer program. So, how did I do this?
The Rule of 72 was my secret weapon! Using this simple formula, I could tell a client how much his current savings for retirement would be worth when they needed the money.
The Rule of 72
Here is how the rule works. You divide 72 by your rate of return. This tells you how many years it will take your money to double. Let’s try it out.
The Rule of 72 in Action
Scenario #1 – Imagine you have $5,000 in savings for retirement today and you are investing aggressively to get an 8% average annual return. If you divide 72 by 8, you get 9. Your money doubles every 9 years. If you have 35 years until retirement, your money will double almost 4 times leaving you with about $80,000 when you retire.
- After the 1st 9 years, you have $10,000
- After the 2nd 9 years, you have $20,000
- After the 3rd 9 years, you have $40,000
- After the 4th 9 years, you have $80,000
Scenario #2 – Image you have $200,000 in savings for retirement at age 40. You are investing moderately and expect a 6% annual return. 72 divided by 6 equals 12. Your money doubles every 12 years. Your $200,000 will be worth $400,000 when you are 52. At age 64, your money will be worth $800,000. This makes retirement a little more feasible.
Use the rule of 72 to quickly figure out how much money will have when you retire the next time you are looking at your savings for retirement.