My daughter is turning 10 this month. I’ve been absolutely in love with my little girl from day one. Her smile, family-first nature and sense of humor have always made me proud to be her father.
Becoming a Dad was actually what turned me into a more serious investor. When you’re caring for little humans, living for today isn’t always the best strategy.
In the beginning, investing (like parenting) was very confusing. I had no idea what I was doing.
There was complex jargon about stocks, bonds, mutual funds, 401k matches and investment brokers not disclosing how they were paid. It felt like the industry was set up for the little guy to lose.
It was around that time that I decided to keep things as simple as possible with my investing journey. I wanted to find ways to take all the noise and boil it down into language I understood.
In my quest to simplify investing, I came across the concept of the Rule of 72.
What is the Rule of 72?
The Rule of 72 helps you determine how long it might take for your money to double. While it’s not perfectly accurate because past market results do not predict future market behavior, it’s a pretty solid “back of the napkin” way to determine where your portfolio might be in the years ahead.
For example, let’s go back to 30-year old Andy (with his new Dad-strength) as he’s becoming a more serious investor. With a net worth now in positive territory, he’s focusing on investing in a Roth IRA because his company is not matching his 401k contributions and their investment options are sub-par.
His Roth IRA now sits around $10,000.
Using the Rule of 72, and assuming a 10% rate of return on his investments, 30–year-old Andy could expect his investment balance to double in 7.2 years. His $10,000 could turn into $20,000 around his 37th birthday (without any further contributions).
The math behind this calculation is as follows:
- Calculation: 72 / Interest Rate = Years to Double
- Example: 72 / 10% = 7.2 Years to Double
Of course, Andy should definitely consider adding additional contributions to his Roth IRA over the coming years and decades to truly maximize the benefits of this excellent tax advantaged retirement option.
How the Rule of 72 Helped Me Become a Better Investor
One of the reasons I like The Rule of 72 so much is that it emphasizes the power of compound interest over time. Let’s take the same example of growing my Roth IRA, but let’s extend the timeline to a more traditional retirement age.
- 2012 (age 30): $10,000
- 2019 (age 37.2): $20,000
- 2026 (age 44.4): $40,000
- 2033 (age 51.6): $80,000
- 2040 (age 58.8): $160,000
- 2048 (age 66): $320,000
*Assuming 10% investment returns every year
Maybe it’s just me, but there’s something about seeing compound interest in action that makes my jaw drop. The $10,000 deposit crosses over the $300,000 mark with no additional contributions!
Realizing the power of compound interest and time, I try to remind myself of my choice investing strategy: patience. Simply waiting and letting the market do the heavy lifting for my retirement portfolio has been (and will continue to be) my way to a comfortable future.
And that comfortable future doesn’t just apply to my retirement. It also applies to my daughter’s future as well.
This Rule of 72 has proven to be more than true for my daughter’s 529 college savings plan. We started her plan with an initial $10,000 deposit as well when she was born. 10 years later, the account balance is over $50,000. It has more than doubled due to time, compound interest and additional contributions.
Why the Rule of 72 Helps Me Relax
In the previous calculations, we showed how 30-year-old Andy could take his initial $10,000 deposit and potentially get to over $300,000 by age 66. What we didn’t show in that amazing calculation is how additional contributions substantially grow that balance over time.
After contributing to my Roth IRA over the past 10 years, my account balance now sits around $120,000. This is much higher than if I would have simply let time and compound interest do it’s thing.
I worked hard in my career, grew my income and contributed part of that income to my Roth IRA. There were even a few years that I maxed out my contributions.
And now, I don’t plan on contributing much to my retirement accounts going forward.
You know why? The Rule of 72.
Let’s run those numbers again with 40-year-old Andy:
- 2022 (age 40): $120,000
- 2029 (age 47.2): $240,000
- 2036 (age 54.4): $480,000
- 2043 (age 61.6): $960,000
*Assuming 10% investment returns every year
The Rule of 72 is telling me that if I simply do nothing, and my investments earn 10% every year, I can likely anticipate almost $1,000,000 in my Roth IRA portfolio before 62 years old.
Well, can we retire with $1 million, you might ask?
For our family, we’re going to need around $2-3 million in retirement (factoring in our comfortable cost of living and inflation). Given this, we’ve also been investing in workplace 401ks, my wife’s Roth IRA and even an HSA.
With all of those combined (and not adding another dime), we project to be well over $3 million by our desired retirement age. Using the 4% rule, that’ll give us around $120,000 per year in income.
And as for my daughter’s 529 college savings plan, the Rule of 72 shows us she may have around $100,000 when she’s 17.
I love math.
Final Thoughts on the Rule of 72
With all “back of the napkin” math problems, the Rule of 72 should not be taken as a perfect solution to your investing worries. Using the free investing tools from Personal Capital will help you get a much better look at your asset allocation and ensure you’re getting an optimal return.
Also, meeting with a professional who knows your particular goals and your overall financial situation can be a smart move, too. That’s when you can really bring the Rule of 72 to life.
Looking ahead another 10 years, I’m excited to see the Rule of 72 continue to work it’s magic for our family. My daughter will be off to college with the majority of it paid for. And my wife and I will be working out the details of our early retirement.
All thanks to math.
Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
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