Many people find that the thought and idea of retirement planning makes them feel a little uneasy. According to a study that was conducted by the Savings Council, the average American spends more time planning a two-week family vacation than they will spend planning for their retirement and their future. The ideas of saving and investing to plan for retirement can be quite intimidating to a lot of people, because so many people are simply not comfortable with the idea of working with numbers. Are you one of these people? Are you afraid of planning for your retirement, because the numbers are not pleasant, or you do not feel like you can do it? If you put off planning for your retirement, you may find yourself in a bad place when you're not prepared in the long run. Luckily, there is a simple concept that can be extremely helpful for anyone who is not familiar with the math involved in retirement planning. This concept, called the Rule of 72, can work wonders when it comes to restoring your confidence regarding retirement and retirement planning decisions.
The Rule of 72 is an incredible concept, because it does not require you to know any additional math skills above basic addition, subtraction, division and multiplication. Using this simple math, you can immediately begin to compare all of the advantages and the disadvantages involved with the financial decisions that you absolutely must be able to make. The first and most important step is to come to understand how this rule works. Once you have seen some practical applications in action, you will likely have a much better idea of how to make the Rule of 72 work for you when it comes to retirement planning and other big decisions regarding your investments.
The purpose of the Rule of 72 is simple: It tells you how quickly your money will be doubled. All you have to do is to take the rate of return that you are expecting, and divide that specific rate into 72. So let us look at a practical application: If you are putting all of your money into a CD with an 4.8-percent interest rate, then you should take this 4.8 and divide it into the number 72. When you divide 72 by 4.8, you get 15. This means that if you are earning a 4.8 percent rate of return every year, your money is going to double every fifteen years.
Here is another practical application: Let us pretend that both you and your spouse are forty years old. You have recently inherited $30,000. Using the Rule of 72, you can determine that if you put this money into a mutual fund earning 10-percent annually, it will only take 7.2 years for this money to double into $60,000 because 72 divided by 10-percent is 7.2 years. This means that by the time you have aged to 54 years, the money will have doubled again to $120,000. If you wait a little longer, within 7.2 more years you will have found your money to have doubled again to $240,000. If you do not touch the money and allow it to continue to accrue interest, by the time you are 68 years old, only 28.8 years later, this incredible nest egg will have swelled to a very mighty $480,000 dollars. Now, aren't you glad that you put that money away into a mutual fund instead of spending it all right away? This is a great argument to make if your spouse tries to convince you to buy a new car, or some other silly luxury item when you can quadruple your nest egg in a few years instead. Is the new car really needed? Not if you consider adding $480,000 to your retirement savings, as that is nearly half a million dollars!
The Rule of 72 is also capable of helping you to determine where you are going to need to put your money today, if you want to have the right amount of money during later years. For example, if you have put away $30,000 for your eight-year-old daughter's college fund, and you know that you need at least $60,000 for her college education in ten years or by the time she turns eighteen years old, you can determine what to do with the money now through the use of the Rule of 72. Using the Rule of 72, you can easily calculate that you need to obtain a return of at least 7.2% every year on your $30,000 if you want your $30,000 to double into $60,000 within the next ten years. All you have to do is divide the number of years that you have remaining, 10, into the number 72 in order to make this determination. 72 divided by 10 is 7.2, which means that you need to invest the money someplace where a return of 7.2% can be achieved annually if you want your $30,000 investment to double in time for your daughter to go to college. As soon as you know what rate of return you need, you can accurately decide how much risk must be taken in order to meet the financial goal that you have made.
Sometimes numbers have an intimidating quality about them, but they do not ever lie. As soon as you have a thorough understanding and working knowledge of how numbers function and how retirement planning works, it can become extremely easy to become more committed to the retirement planning process. The Rule of 72 is an incredibly easy mathematical equation that makes it simpler than ever to make the right steps in your retirement planning process. Now that you understand the Rule of 72, use it to your advantage and make some important decisions regarding your retirement. You will be glad you did!