What is the rule of 72?
The Rule of 72 helps you determine how long it might take for your money to hypothetically double. While past market results do not predict future market behavior, the “rule of 72” can be a useful framework for getting an estimate of how your investment could grow. While not a perfect science, the rule of 72 is one method to help determine where your portfolio might potentially be in the years ahead. For a more personalized guide, it’s helpful to work with a financial professional.
The rule of 72 formula
The “math” behind this rule of 72 calculation is as follows:
- Calculation: 72 / Rate of Return = Years to Double
- Example: 72 / 10% = 7.2 Years to Double
For example, let’s assume you’re a 30-year-old focusing on investing in a Roth IRA and your total balance currently sits around $10,000.
Using the rule of 72, and assuming a10% rate of return, you could expect your investment balance to double in 7.2 years.1 The initial $10,000 could turn into $20,000 (without any further contributions).
FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical illustration does not reflect a particular investment and is not a guarantee of future results. The rule of 72 is a mathematical rule used to approximate the number of years it takes a given investment to double in value. Rates of return may vary.
Of course, you could also consider adding additional contributions to the Roth IRA over the coming years and decades to help maximize the benefits of this tax advantaged retirement option.
How the rule of 72 can help you
One benefit of The rule of 72 is that it emphasizes the power of compound earnings over time. If you first invested $10,000 at age 30, by the time you reach traditional retirement age you could have $320,000 in your account, without any additional contributions.
- 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. Rates of return may vary.
Simply waiting and letting the market do the heavy lifting for your retirement portfolio can be one path towards a comfortable future. Of course, you should still consider keeping an eye on your investments and making changes when needed – when there are life changes, like having a child or when you need to rebalance your investments.
Why the rule of 72 can give peace of mind
In the previous calculations, we showed how a 30-year-old could take an initial $10,000 deposit and potentially get to over $300,000 by age 66. But how can additional contributions potentially grow that balance over time?
If you continued to make additional contributions to the Roth IRA over the next 10 years, your balance would of course be much higher than if you simply let time and compound earnings do its thing.
Let’s run those numbers again for a 40-year-old individual who has reached a Roth IRA balance of $120,000:
- 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. Rates of return may vary.
The rule of 72 suggests that if you made no additional contributions from this point on, and your rate of return was 10% every year, you could potentially anticipate reaching $1,000,000 in the account before reaching the age of 62. However, keep in mind that rates can vary and there can be times when the value of the account can go down.
But can you retire with $1 million?
There are plenty of factors that go into how much you’ll need during retirement, including your household size, financial responsibilities, desired lifestyle, the impact of inflation, and more.
Ultimately, there’s no one-size-fits-all approach to retirement savings, nor is there a universal retirement savings target. It’s important to focus on your own financial situation and needs rather than fixating on an arbitrary goal like retiring with $1 million.
Final thoughts on the rule of 72
The rule of 72 should not be taken as a perfect solution to your investing worries – it’s a guideline for consideration when planning for your long-term goals. Keep in mind it is only a mathematical formula that helps determine how long it hypothetically takes for your money to double. It emphasizes the power of compound earnings over time and is not a guarantee of success. Using the free financial dashboard from Empower can help you get a much better look at your asset allocation and rate of return, so you know where you stand.
