“Derek, I’m in trouble. I’m 50 years old and we’ve only got $300,000 saved for retirement. There’s no way we can survive on that! It’ll only last us 10 years before it’s all gone!!”
I’m approached with the terror above quite a bit. People have been saving their entire lives, they hit the magic age of 50 where everyone seems to freak out a bit, and they suddenly look at their retirement account with extreme apprehension.
So how do they typically respond? One of two ways:
- They start investing much differently than they had before – in high-risk, high-reward stocks, or
- They keep their head down, stay the course, and just hope everything works out.
While I don’t love the “stick your head in the sand approach” of #2, it’s actually the option that I’d recommend (that is, if you’re invested appropriately for your age already).
The Rule of 72.
What is the Rule of 72? And How Will It Help You Become Wealthy?
For many of us (you know, all of us non-app developing phenoms), it takes quite a long time to build wealth. By why is that?
It’s simple really.
It takes a while for compound interest to really show up and become noticeable. For the first 10-20 years, we don’t really realize that our money is growing exponentially, because we really haven’t saved that much! But, once it grows to a decent amount, the compound growth can be astounding!
Still not quite sure what I’m talking about? Check out the quick video below on the Legend of the Chessboard.
This video is a great lead-in to the “Rule of 72”.
The Rule of 72
The Rule of 72 is a quick way for anyone to figure out how quickly their money will double. Here’s the formula:
72 / (yearly interest rate) = # of years for your money to double
So, if you earn an average of 10% interest a year on a $10,000 investment, how long will it take for this money to double?
72 / (10) = 7.2 years
It will take 7.2 years for the $10,000 to turn into $20,000.
Pretty simple right?
Remember how we intro’d this article? One of my readers was freaking out because she and her hubby had only saved $300,000 so far in their retirement account. They were 50 years old.
But, in actuality, should they really be freaking out? The Rule of 72 will tell us.
Chances are, they plan to work until they’re 65 years old before they retire, which means that their money still has 15 more years to grow. Even if they didn’t put another cent into their retirement accounts, at 10% their money would double in 7.2 years, and then double again in the next 7.2 years.
So how much does their $300,000 become?
You know what? I think they’ll be okay, don’t you?
Use This Math to Estimate Your Future Wealth
Liz and I are 32 years old. Between our rental properties and our 401(k) investments, we earn an average of 12% interest each year. What if say, we have $200,000 invested? What will that turn into by the time we’re 68?
First, we apply the Rule of 72:
72 / 12 = 6 years
So if we did nothing more than keep our money invested in our two rental properties and in our 401(k), it would double every 6 years.
Second, we double the $200k starting from today until our proposed retirement age:
- Age 32: $200k
- Age 38: $400k
- Age 44: $800k
- Age 50: $1.6 million
- Age 56: $3.2 million
- Age 62: $6.4 million
- Age 68: $12.8 million
Well sheesh…why the heck are we still working so hard?!! Based on the rule of 72 we’ll have $12.8 million dollars when we’re ready to retire! I think we could survive on that.
The reality is, nobody knows what the future holds. So, while we can still move and shake these young bodies of ours, we’re going to put them to work so we can have an amazing life and an even more amazing retirement! 🙂
So what about you? What does the Rule of 72 say about your retirement funds? How much do you think you’ll have?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.