Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, February 4, 2011

"Rule of Thumb" Puts Retirement Needs in Perspective

You may or may not have heard of a rule of thumb called the “Rule of 72”. It’s a handy rule you can use to estimate how long it will take you to double your money based on a particular interest rate. Most people use it to project how their portfolio will grow depending on the investment return they expect to realize. You can also use it to estimate the impact of inflation on your purchasing power.

First, a quick explanation of the rule. It’s really quite easy to apply. Let’s suppose you believe you can earn 7 percent over the long run on your investments, before tax, and 6% after tax. If you divide 72 by the after-tax return of 6, the result is 12. The result of this calculation, 12, is the number of years, approximately, that it will take for you to double your money, assuming an after-tax rate of return of 6 percent.

Thus, if you currently have a portfolio of $250,000 and believe you will need at least $1 million in order to retire, you will need to double your money twice, first to $ 500,000 and then again to achieve your $1 million. If you expect to receive an after-tax return of 6 percent it will therefore take you 24 years.

In planning for retirement, we believe too many people fail to consider the impact of inflation on the amount of money they will need in retirement. This is especially true for those in their sixties, who often use their current spending rate to estimate what they will need in retirement. Yet, they may live another twenty to thirty years. If inflation during their retirement years is 3 percent, according the rule of 72, their living expense budget will double in just 24 years, and in just 18 years, if inflation is 4 percent!

Applying this simple rule can open your eyes to the difficult task of saving for retirement. In most cases, the amount you’ll need is likely far more than what you’ve been thinking. We hope you’ll find this simple rule a helpful tool to bring things into perspective.


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