Sunday , 18 August 2019

Rule of 72: A Method To Predict the Time Needed For A Portfolio Or Income Stream To Double

The Rule of 72 is a classic investment and saving rule to easily determine how long it will take an investment to double in size. This is calculated by taking 72 and dividing it by the percent of return of your investment or saving account.

https://static.seekingalpha.com/uploads/2019/5/16/48716285-1558023249153278.png(Source)

This Rule of 72 can help careful investors calculate how long they need to achieve a desired portfolio size or how many years they need to keep investing all of their returns to achieve a set goal. For example,

  • a portfolio yielding 9-10% would take 7.2-8 years to double the portfolio and thus double your income stream…
  • If an investor started with a portfolio of $100,000 and aimed to have $80,000 annually from his investments alone in retirement, it would take him x years to reach his goal depending on the yield of the portfolio:
Yield of Portfolio Years to Reach Goal
10% 21.6 years
5% 57.6 years
3% 120 years

The time frame it takes to achieve your goal expands exponentially, the lower your portfolio yield is. This is because your portfolio yields less income, and that income compounds at a slower rate…

Takeaways

The Rule of 72 is a time-proven method to predict the time needed for a portfolio or income stream to double…

Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement. The author is receiving compensation from Seeking Alpha for pageviews of his original article as posted there so please refer to it for the unedited version

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Related Article from the munKNEE Vault:

1. The Rule Of 72 Can Help You Reach Financial Goals – Here’s Why & How

Compounding can be tricky to calculate in your head, however, unless you’re a math whiz. The good news is you can use a mathematical shortcut called the “rule of 72” to quickly estimate how long it takes an investment with a fixed annual return to double in size.

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