The Rule of 72:
The Rule of 72 The Rule of 72 is generally used to calculate the number of years it takes to double invested money. Applied that way, divide 72 by the interest rate , and the result is the number of years it will take to double your money . This formula, requiring only simple arithmetic, assumes that no additional principal is added to the investment over the years it is held. FOR EXAMPLE: Years 72 7 10 Years 72 10 7 The result of 72 divided by 7 indicates that at an 7% interest rate, you will double your money every ten years . If you can earn 10% interest, your money will double about every seven years .
The Rule of 72:
The Rule of 72 Years 72 3 24 Let’s assume you are retiring today and could make ends meet with a $3,000-a-month income. So , assuming a 3% average annual inflation rate , you would need $6,000 a month, twenty-four years from now to buy the same amount of goods and services you can get today for $3,000 a month. If I had a $1-million nest egg accumulated, a 7.2% * return on it would generate $72,000 a year, or $6,000 per month indefinitely. If you want to know how much you would need thirty years from now to buy the same loaves of bread or gallons of gasoline at a 3% average inflation rate, you divide 72 by 3 . That tells you the cost of living will double approximately every twenty-four years . * Net of tax
The Rule of 72:
Years 72 5 15 The Rule of 72 Fortunately, during the 1990s up to now, inflation has been very low. But during the 1970s and early 1980s, we experienced a high rate of inflation into the double digits. So to be safe, let’s assume an average inflation rate of 5% for the next thirty years— 72 divided by 5 — tells us that the cost of living at 5% inflation will double approximately every fifteen (15) years . So, to buy the same amount of goods and services you can get for $3,000 a month today, you would need: $6,000 a month – Fifteen ( 15 ) Years from now, and $12,000 a month – Thirty ( 30 ) Years from now
The Rule of 72:
The Rule of 72 So how much would you need to accumulate in a retirement nest egg to generate $12,000 a month in tomorrow’s dollars? Simply take $12,000 per month times twelve (months), which equals $144,000 in annual income. Assuming you could earn an average of 8% return on your retirement accounts, you would need $1,800,000 ($144,000 ÷ 8%) to generate $ 12,000 a month. Capital $144,000 8% $1,800,000 This is an interest-only solution, where you would not deplete your principal of $1,800,000 , which might be helpful to hedge against cost-of-living increases.
The Rule of 72:
The Rule of 72 How much would you need to set aside each year if you were earning an average of 8% interest to accumulate $1,800,000 in thirty years ? A financial calculator comes in handy here. Enter $1,800,000 as the future value, 8% as the interest rate, and 30 as the number of years, and then solve for the Annual Payment The answer is $14,712 That is how much you would need to invest in an account earning 8% per year to accumulate $1,800,000 by Year 30 . Assuming you could earn 10% interest, you would need to set aside only $9,948 a year. And, at 12% interest, you would need to set aside only $6,660 per year. - Adapted from Missed Fortune 101