Figuring out how long it will take you to save up for a ski weekend isn’t too complicated—and it may even be fun, as the closer you get to your goal, the more vividly you can picture yourself on the slopes. But crunching the numbers to see how long it’ll take to reach your retirement goals? Not so much.
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Doing any kind of math related to your golden years can feel intimidating because you’re likely expecting results that show how far behind you are in your savings.
That may be why only 48% of people have even bothered trying to figure out how much they need to retire comfortably, according to the Employee Benefit Research Institute’s 2015 Retirement Confidence Survey.
There is, however, an easy-to-remember formula that could provide a quick gauge on your nest-egg progress. We've asked Cheryl Krueger, CFP®, president of Growing Fortunes Financial Partners in the Chicago area, to share how you can use the “Rule of 72” to help you gauge the potential for your retirement savings to grow.
Why You Want to Learn This Math Lesson
A lot of my clients may have heard of the Rule of 72, but aren’t quite sure what it means. Essentially, it’s a shortcut for approximating how long it will take for your money to double at a given annual compound interest rate or rate of return.
And getting an understanding of how compound growth can potentially grow a portfolio can light a fire under you to start saving for retirement as early as possible—or perhaps to up your contributions if you feel you’re lagging behind. And how can you not get at least a little bit giddy over the idea of doubling your money?
How It Works
You simply divide 72 by the annual growth rate or interest rate. For example, if you had retirement savings that were returning a hypothetical 7% a year, it would take a little more than 10 years for your investment to double (72/7 = 10.3).
The formula also works if you’re trying to figure out what annual growth or interest rate you need to double your money in X number of years. For instance, if you wanted to double your money in five years, you’d need a whopping 14.4% rate of return (72/5 = 14.4).
The Rule of 72 is reasonably accurate for growth rates that fall between 6% and 10%; the further away from this range you go, the less accurate it becomes. Still, it’s a handy way to do quick compound math in your head when you don’t have a fancy compound interest calculator handy.
The reason I like this formula is that it helps people understand the value of saving and just how much your savings can accelerate through compounding. You’re not just potentially getting a return on your original contributions, but also a return on what your money is earning every year.
The Rule of 72 also helps drive home how much more you could save by starting earlier—after all, if your money could possibly double every 10 years, you’ll have much more time to grow the money if you have, say, three decades left until retirement, as opposed to two or one.
Whenever I do a retirement review for clients in their 40s or 50s, they almost always say, “I wish I’d done this years ago.” Then they bring in their 20-something kids so they can get started on their nest eggs. Saving for retirement is a good thing to start in the beginning of your career so you don’t have to worry about getting behind later.
Here’s a quick example of the power of starting early: A 45-year-old who starts saving $2,000 a year for retirement in an account earning a hypothetical 6% a year will have $77,985 saved by age 65. A 25-year-old saving the same amount at the same growth rate will have $328,095 by age 65.
To put it further in perspective: To get anywhere near the younger saver’s total, the 45-year-old would have to sock away $8,414 a year—more than four times the annual savings amount of the 25-year-old.
The Bottom Line
If retirement math intimidates you, or you simply need a quick gut check to see if you’re on track with your desired retirement timeline, use the Rule of 72 to calculate a ballpark figure for how long it’ll take your savings to double at your current rate of growth. The results could help you determine if you need to step up your retirement savings game.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.