The Rule of 72 is a simple arithmetical equation approximating how long to double your investment at an annual rate of return. In this video, Cary Stamp, CFP® and financial analyst Austin Kuyrkendall explain the power of investing your assets over the long term at a higher rate of return, using the Rule of 72.
Cary: I’m Certified Financial Planner, Cary Stamp with Cary Stamp and Company and I have my associate Austin Kuyrkendall with me today because we want to demonstrate the power of investing for the long term. So if you are still a number of years until you will be eligible for retirement or planning to retire, you need to listen to this. It’s really important. Austin, how old are you?
Austin: I’m 24 years old.
Cary: So when are you planning on retiring, aside for next year since you’re probably going to be the president of the company, right?
Austin: Well, let’s hope so. Not for at least another 40 years.
Cary: Another 40 years. So let’s talk to a 40 year old person right now that might be retiring in about 24 or 25 years. And I’m going to give a little lesson on how you can determine whether or not it makes sense to take some risk with your money. So we’re going to talk about what’s called the Rule of 72. Austin: The Rule of 72 is a method for determining how long it will take for your money to double at a given rate of return. So, Austin, if your rate of return is 3%, how many times does three go into 72?
Austin: 24 times.
Cary: 24 times. Good answer. So it means that if you invest your money at 3% and leave it alone, it will double in 24 years. And Austin, if you make a 9% rate of return, how many times does nine go into 72?
Austin: Eight times.
Cary: Eight times. And so what does that mean? In eight years, your investments will have doubled. In eight years at a 9% return, your money will have doubled. So the long-term returns for equities are close to 9%. The long-term return for bonds and other fixed type investments are much closer to 3%. So think about this for just a moment.
Cary: Let’s assume that you have a 401k or an IRA and you’re making long-term investments for retirement. You’re 40 years old and you have 24 years, which is longer than Austin’s been alive, to invest your money. So you have $10,000, and over the course of time, you put your $10,000 into a 3% investment. In 24 years, this 40 year old person is 64, they’re about ready to retire. How much do they have? $10,000 x 2, right?
Austin: Yep, that’s right.
Cary: And that is…
Cary: $20,000. Very good. Now, the smart person says, I’m going to use the stock funds inside of my 401k and invest in a higher rate of return. And they make a 9% rate of return over that same period of time. They have 24 years. How many times does eight go into 24, Austin?
Austin: Three times.
Cary: So their money is going to double three separate times. So that’s $10,000 x 2 x 2 x 2 is how much? $10,000 times two is…
Austin: $20,000, $40,000, $80,000.
Cary: All they had to do was invest in the right asset class, be willing to take a little bit of risk, and you have way more money than the conservative investor at retirement. Think about that when you’re thinking about allocating your 401k’s because in 24 years, you could have something that looks like this standing next to you. Would you rather have that or a bunch of money in the bank? I know your answer. I’m Cary Stamp with Cary Stamp and Company and this has been a Principled Wealth Moment. Thank you, Austin.
Austin: Thanks Cary.