The Rule of 72
- 1 day ago
- 3 min read
Updated: 9 hours ago
By Thomas R. Kestler
You’ve probably heard of The Rule of 72, but what is it? In simple terms, it’s a way to approximate how long it will take for a lump sum to double at a given interest rate. The beauty of the rule is you can do it quickly, in your head. The formula is:
72/ Your Interest Rate = Years to Double.
For example, if you are in a 3% savings account, it would take about 24 years to double (72/3). On the other hand, if that same lump sum was in a conservative mutual fund earning 8%, it would double in 9 years.
The Rule is a quick and dirty way to estimate account growth at different rates. But what if you’d like to estimate what your 401k balance of $30,000 would be worth in 30 years if you earn an average of 10%? In that case, you have three options:
1. Do some very complicated math
2. Use a future value (FV) calculator, or
3. Use a simple Compound Interest Table
If you follow the link above and download these two pages, you’ll have everything you need to do some accurate projections. If you use the FV of $1 Lump Sum Table and go over to 10% and down to 30 years, you’ll see the factor is 17.45. Do the simple math ($30,000 x 17.45) and you’ll come up with $523,500. Pretty Nice.
However, you’re adding $500/month to your 401k. What about that? Simply go to the Future Value of $1/Month Table and do the same exercise. The factor for 10% and 30 years is 2,260.49. The simple math again ($500 x 2,260.49) gives you $1,130,245. Add them together and you can assume your 401k would grow to about $1.65 million at retirement.
This sounds pretty good until…you consider inflation. If you’d like to retire on $50,000/year in today’s dollars, how much will you need in 30 years to maintain the same standard of living? If you go back to the Future Value of $1 Lump Sum Table, over to 3% and down to 30 years, the factor is 2.43. So, in 30 years, you’ll need an annual income of over $121,000 to maintain that same standard of living – way more than your 401k can support.
You can use the tables to calculate how much more you’ll need to save in order to reach your goals.
We’ll be diving deeper into these tools in our upcoming classes:
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Tom Kestler has been involved in the financial planning field for over 45 years. He is a graduate of Millersville State University and the College for Financial Planning in Denver, Colorado (for which he has acted as an adjunct instructor) and carries the Certified Financial Planner (CFP) designation.
He has also been awarded the Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Mutual Fund Counselor (CMFC) designations from the American College in Bryn Mawr, PA. He was the founder of Kestler Financial Group, Inc., a firm which specialized in the marketing of financial products and services to over 5,000 independent representatives throughout the United States. Kestler Financial Group was acquired by Highland Capital in 2018.
Mr. Kestler carries Life, Health and Variable Products licenses in several states and provides consulting services to insurance companies on product design and development. He also acts as an expert witness in securities and insurance litigation cases.
Prior to his retirement, Tom served as VP Advanced Sales at Highland Capital, and also CEO of Branch Development Partners, an Office of Supervisory Jurisdiction (OSJ) for Securities America, Inc. (now Osaic), an independent securities broker/dealer.
Tom is teaching our Financial Wellness Course— the next class is scheduled for Monday, February 23rd. Sign up today!
In the meantime, if you have a question for Tom, please post it below in the Comments box and he'll answer it for you.
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