Author Topic: Question about rule of 72  (Read 2397 times)

flowerofsun

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Question about rule of 72
« on: January 30, 2019, 01:06:30 AM »
Hi guys,
I was wondering if you please would be so kind and help me out?
Lets pretend a person has 500K in his 401K . Accourding to rule of 72, if interest rate is 6% then in 12 years his money will double? So basically it will be 1mln?
Does it even work in real life? I feel like I am getting really frustrated with my 401K...
Thank you

Andy R

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Re: Question about rule of 72
« Reply #1 on: January 30, 2019, 01:24:54 AM »
The accurate maths formula is
500000 * ((1.06)^12).
It should be pretty close to the rule of 72 though.

It only works in real life if it is invested in a guaranteed return investment like a cash deposit. Otherwise it is a "best guess" and the nature of investments are that it goes up and down and all of the place in the short and medium term.


Why are you getting frustrated with your 401k?

Stimpy

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Re: Question about rule of 72
« Reply #2 on: January 30, 2019, 08:04:27 AM »
I think you math checks out for the most part, but remember this "rule" only really works for direct interest.  Stocks and such may go higher, lower or nowhere over a short period, so it might be 2 years for it to double, or 200 years.  Just be patient. it will get there.   Below is a graph from a retirement account I have (value taken out on purpose) but you'll notice, that it took several years just to start to look like my investments were doing anything.  (Granted there is more to this story but the point is relevant!) Just sit back and watch.  It will go somewhere eventually.



Metalcat

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Re: Question about rule of 72
« Reply #3 on: January 30, 2019, 08:14:49 AM »
Yeah...sorry...what are you frustrated by???

JZinCO

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Re: Question about rule of 72
« Reply #4 on: January 30, 2019, 08:25:40 AM »
Hi guys,
I was wondering if you please would be so kind and help me out?
Lets pretend a person has 500K in his 401K . Accourding to rule of 72, if interest rate is 6% then in 12 years his money will double? So basically it will be 1mln?
Yup.
Does it even work in real life?
That's the beauty of math.
I feel like I am getting really frustrated with my 401K...
Your investments aren't obliged to follow the CAGR you want.
Thank you
You are welcome.

Mississippi Mudstache

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Re: Question about rule of 72
« Reply #5 on: January 30, 2019, 08:27:09 AM »
What funds are you invested in? What are the expense ratios? How long have you been invested?

flowerofsun

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Re: Question about rule of 72
« Reply #6 on: January 30, 2019, 11:44:26 PM »
What funds are you invested in? What are the expense ratios? How long have you been invested?
Mostly S and P (I think 70%), then 10% in international, 10% in something else...(If it makes a big difference I can look and tell exactly what its in)
So I started investing I believe in 2013 or may be 2014, (again, if it makes a difference I can look and tell for sure)
Every year I max it out and put 18K plus my company matches and gives 4K every year (so its 22K per year)... So now I only have 110K...I feel like its almost like savings account...

To be completely honest, I did take out a loan 20K (when I was going through some difficulty in my life) but then I returned it all...

I started doing doing it for tax purposes to lower my income ...

marty998

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Re: Question about rule of 72
« Reply #7 on: January 31, 2019, 12:00:14 AM »
What funds are you invested in? What are the expense ratios? How long have you been invested?
Mostly S and P (I think 70%), then 10% in international, 10% in something else...(If it makes a big difference I can look and tell exactly what its in)
So I started investing I believe in 2013 or may be 2014, (again, if it makes a difference I can look and tell for sure)
Every year I max it out and put 18K plus my company matches and gives 4K every year (so its 22K per year)... So now I only have 110K...I feel like its almost like savings account...

To be completely honest, I did take out a loan 20K (when I was going through some difficulty in my life) but then I returned it all...

I started doing doing it for tax purposes to lower my income ...

I feel at this point it might be worth learning about the concept of fees and the drag they cause on returns and balances long term.

Andy R

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Re: Question about rule of 72
« Reply #8 on: January 31, 2019, 12:45:09 AM »
What funds are you invested in? What are the expense ratios? How long have you been invested?
Mostly S and P (I think 70%), then 10% in international, 10% in something else...(If it makes a big difference I can look and tell exactly what its in)
So I started investing I believe in 2013 or may be 2014, (again, if it makes a difference I can look and tell for sure)
Every year I max it out and put 18K plus my company matches and gives 4K every year (so its 22K per year)... So now I only have 110K...I feel like its almost like savings account...

To be completely honest, I did take out a loan 20K (when I was going through some difficulty in my life) but then I returned it all...

I started doing doing it for tax purposes to lower my income ...

Something sounds a bit off here.
If you are 70% S&P since 2013, even accounting for the lack of compounding in the first couple of years due to so much less funds and even if you have management fees, I think it should have gone up a little with the way that S&P has moved since then.
2018 lost about 4-5% up to today, but every year before that was very good.
I suspect you are not accounting for something.

MustacheAndaHalf

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Re: Question about rule of 72
« Reply #9 on: January 31, 2019, 07:08:15 AM »
What funds are you invested in? What are the expense ratios? How long have you been invested?
Mostly S and P (I think 70%), then 10% in international, 10% in something else...(If it makes a big difference I can look and tell exactly what its in)
So I started investing I believe in 2013 or may be 2014, (again, if it makes a difference I can look and tell for sure)
Every year I max it out and put 18K plus my company matches and gives 4K every year (so its 22K per year)... So now I only have 110K...I feel like its almost like savings account...

To be completely honest, I did take out a loan 20K (when I was going through some difficulty in my life) but then I returned it all...

I started doing doing it for tax purposes to lower my income ...
If you mean "the S&P 500", like Vanguard's S&P 500 ETF ("VOO"), it earned 8.45% per year for the past 5 years.  That's actually pretty good.  Over 5 years, that's a +50% increase.  But you probably have new contributions mixed in there, which wouldn't have had much time to grow yet.

Fees are important - your next step should be to make sure the "expense ratio" of 70% of your retirement assets is rather low.  For example, Vanguard S&P 500 ETF charges 0.04% per year - very low.  If you're paying a lot more (0.30% or so), that can add up over time.

And then, it might be better to have more international.  Some decades U.S. stocks do better, some decades international beats the U.S.  So if you can move up to 20% international, that will diversify your portfolio a bit better.

flowerofsun

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Re: Question about rule of 72
« Reply #10 on: February 01, 2019, 01:02:21 AM »
Thank you guys so much!