Listener Suzanne wants to know our thoughts on her current 401K situation and so she can retire at age 60. We explain the Rule of 72.
The Rule of 72 is a just a very simple, straight forward method to give you a ball park idea of how long a given investment will take to double based on the average annual return. By dividing 72 by that average annual rate of return investors get a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the Rule of 72 states that a single $1 into an investment that returns 8% on average annually long term will double in 9 years. 72 / 8 = 9.
8% is a low-end average for the S&P 500 index fund. So let’s say you are 30 years old with a balance of $100,000. It would take 9 years to double that money to $200,000 if you did nothing else including contributions, changes, withdrawals. 9 more years you would have $400,000 and an additional 9 $800,000 at age 57. Make it all the way to age 66 you would have approximately $1,600,000 based on the general Rule of 72.
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