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The Rule of 72 and the 4% Draw

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Hello my savvy LGBT investors! Here’s a handy formula that I think you’ll find helpful. It’s called the rule of 72
72 pic

Credit: Kristy Hall
The Rule of 72 helps you figure out how long it will take to double your money
It’s pretty easy. First, take your rate of return on your investment.
For this example, let’s say you are getting a 10% return.
Divide 72 by that number.
In this case 72/10 = 7.2
The answer (in this case 7.2) is the number of years it will take for you to double your money.
Let’s do another one!
8% return
72/8= 9
So it’s 9 years to double your money.
So those people who have “safe” investments, like CD’s, that pay .5% interest?
It will take them 144 years to double their money!
That’s why you don’t want to put your long term money into short term investments!
I’m not saying that market volatility doesn’t play a role. It does. Certainly some years your portfolio will perform different than others. You may get 20% one year and -10% in others. Again, depends on you and your investments. But it’s handy for illustrative purposes. The rule of 72 is purely a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.
Why do you want to know this?
First off, you look pretty impressive at cocktail parties. But more importantly, you can use another rule of thumb that I like to use for an “off the cuff” calculation.
Many consider the safe standard to withdraw money from an investment account is a rate of 4%.
Now this isn’t written in stone. It can be higher, it could be lower. It all depends on what your investments are and risk tolerance. The 4% is a “be safe” sort of guideline.
You can use this to figure out how much money you will need for retirement.
Of course, this is a ballpark estimate. I have to emphasize ballpark.
Another example: If you need to pull of $30,000 a year off of your investment accounts, that means you’ll need to have $750,000 saved.
Using 4% as our draw rate:
30,000/.04 = 750,000
Where 30,000 is how much you want to take out of the account each year
The .04 is the 4% draw rate
The 750,000 is the resulting amount of principal with which you need to start.
Like I said before, this is not a hard and fast rule. Things like risk tolerance and investments in your account will make a difference. Certainly don’t use this formula as a substitute for a real financial plan. It might make you feel better about the amount you currently have saved. Maybe it will have you strive to save more.

An ADPA (Accredited Domestic Partner Advisor) designated Financial Advisor can assist you with your financial planning and investment needs.
Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial. www.silverkeywealth.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Silver Key Wealth Management, a registered investment advisor and separate entity from LPL financial.
Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, VA, NJ, TX. www.finra.org. www.sipc.org

 

The Rule of 72 and the 4% Draw
August 13, 2014
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