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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
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. <\/p>\n\n\n\n
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.<\/p>\n\n\n\n