What the Rule of 72 Says 



The Rule of 72 is a finance building block anyone can use to help predict the way your cost of living will increase depending upon the rate of inflation or how your investments will grow depending upon their annual rate of return. This month we received a letter from a retiree in New Jersey speaking to its importance. We thought we would share excerpts of this letter and “The Rule of 72” 



Dear Editor 


I am an 85 year old retiree from New York Telephone Company. In retirement I am very busy doing things I believe to be worthwhile. 


I am kept very busy, working, among other things with the 117th Cavalry Association of the New Jersey National Guard; attending to my wife’s needs, both current and future; and trying to help family, friends and associates think and plan constructively for their future comfort and security in these times of ever increasing costs for everything that we need and do. In school I majored in economics and it remains a subject I am very interested in. 


“The Rule of 72” is a tool that everyone can use to help prepare for what I believe will be an increasing cost of living in their retirement years. It is probably nothing new to many financially trained people but the information can be of great benefit. 


I know 40Ks and IRAs, which we did not have in my years, offer fine savings opportunities for employees in business today to prepare for their retirement. But I also know that many people neither use them to their best advantage, nor seek the advice from their financial advisor. 


It is important that they do so, and have a methodology to help them examine their potential needs and prepare to accommodate them may be worthy of publication. Would you please print for your readers “The Rule of 72.” 


Sincerely yours,

Robert C. Lutz

Tinton Falls, New Jersey 




The Rule of 72 


“The Rule of 72” provides a way to determine how many years it will take for anything to double based upon its annual percentage rate change. 


It is useful to help you predict the way your cost of living will increase depending upon the rate of inflation or how your investments will grow depending upon their annual rate of return 


The procedure is simple. To determine how long it will take for the subject in question to double, simply divide the annual rate increase into 72. 


For example: to determined how long it will take for your ‘Cost of Living’ to double, you must divide the average annual rate of inflation into 72 (eg): 


Assuming the rate of inflation to be 5% 72/5 = 14.4 yrs In 14.4 years your cost of living will double. Assuming the rate of inflation to be 7% 72/7= 10.28 years In 10.28 years, your cost of living will double



It is very important to consider the impact of inflation on your cost of living. It can be devastating. It was as high as 13% for a short time under President Carter.) The Government says it is well under 5% at present (June 2006) But is that truly so? Does it truly reflect your costs for transportation, home heating, electricity, food, clothing, doctors, medicine and schooling for kids etc? 


To use the Rule of 72 to determine how many years it will take you’re current invested assets to double in value, (assuming the growth rate doesn’t change, you divide the average annual percentage rate of growth by 72 (eg) 


Assuming the average annual rate of return on your investments is 6% (eg) 72/6= 12 yrs In 12 years your present invested assets will double in value assuming you have nothing out, and the rate of return remains the same Assuming the average annual rate of return on your investments is 9% (eg) 72/9= 8 yrs In 8 years your invested assets will double in value, assuming you take nothing out, and the rate of returns remains the same.



Of course they will also continue to grow as you continue to add more input to your investments each year. 


What do you need to maintain your desired lifestyle in your retirement years? 



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