Discover the rule of 72

And how it can inspire you to save more

The truism "it takes money to make money" applies to many situations. Fortunately, when it comes to saving money for retirement, all it takes is a little money early on to potentially have a lot of money later in retirement. Why? Because of the wonderful combination of compound growth and time. And a great way to better understand how this combination can positively affect your plans for retirement, let’s look at a concept we’ll call the “rule of 72.”

“The rule of 72”: It's all in the math!

A great way to demonstrate the power of compound growth is to focus on the numbers 7 and 2—especially for savers with plenty of time on their side. Here’s how…

First, the “rule of 72” states that an investment with an average annual return rate of 7.2% is set to double every 10 years.

Here's a “rule of 72” example: If 20-year-old Sarah invested $1,000 today and just left it there until she retired at age 70, she could end up with something like $32,000. A 32x increase. Based on the historical, long-term returns of US large-cap stocks, the assumption of 7.2% growth is very reasonable (although past performance is no predictor of future returns). Even if Sarah invested that $1000 at age 30, she would still have $16,000 at age 70.

The “rule of 72” states that an investment with an average annual return rate of 7.2% is set to double every 10 years.

Similarly, assuming a 10% rate of return, the money will double every 7.2 years.

This means that, in our example, at age 70, Sarah's balance would look more like $128,000— A 128x increase! This growth is possible because, historically speaking (that is, 1928 through 2023), the average annual return rate for the S&P 500 has been approximately 10%. And this growth does not include things like increasing contribution rates, salary increases, etc. that a person will typically experience throughout their working years.

On the flip side, the “rule of 72” can also apply to credit card debt

Just like the accelerated growth on your savings, the same thing can happen—in the opposite direction—when debts compound. And credit card providers typically charge interest rates higher than 10%. But for the sake of this argument, let's suppose Sarah's twin sister, Julie, owes $1,000 and the rate is 10%. If she avoided repayments for 7.2 years, she would double her debt!

Understanding this “rule of 72” can help you quickly understand both the potential benefit of saving early—and the potential cost of credit card debt. And, whether you are still quite early or well into your career, there may be no better time than the present to invest in your retirement.

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