What Is The Rule Of 70, And How Is It Calculated? - The ...

The rule of 70 is a way to estimate how many years it takes for a person's money or investment to double. Typically, the rule of 70 is a ...  ViewAllRetirementInvestingMutualFunds401kIRAStudentLoansCreditScoreDefinitionsTaxStocksMichaelDiBartolomeoApr30,20218minreadWhatIstheRuleof70?Theruleof70isawaytoestimatehowmanyyearsittakesforaperson'smoneyorinvestmenttodouble.Typically,theruleof70isacalculationtohelpdeterminethenumberofyearsitmighttaketodoublethemoneywithaspecificrateofreturn.Thisruleisoftenusedtocompareinvestmentswhentheyhavedifferentannualinterestratescompounded.Thatway,it'seasytofindouthowlongitwouldtaketoseetheinvestmentquicklygrow.Sometimes,financialinvestorsrefertotheruleof70asdoublingtime.TheFormulaWhatistheruleof70?Itrequiresaspecificformula.Youdivide70bytheannualrateofreturntogetthenumberofyearsitwouldtaketoseetheinvestmentdoubleinsize.HowtoCalculatethisRuleof70Itisessentialtogettheannualgrowthrateorreturnrateontheinvestmentorthevariable.Dividetheannualgrowthrateoryieldby70toseetheresults.WhatDoesThisTellanInvestor?Theruleof70helpsinvestorsdeterminethevalueoftheirinvestmentrightnowandwhatitmightbeinthefuture.Whilethisisaroughestimate,therulecanbeveryeffective.It'seasiertofigureouthowmanyyearsitwouldtakeforthatinvestmenttodoubleinsize.Investorscaneasilyusesuchametrictoevaluatedifferentinvestments.Thesecanincludethegrowthrateforaperson'sretirementportfolioormutualfundreturns.Forexample,acalculationyieldedtheresultof15yearsbeforetheportfoliodoublesinsize.Theinvestorprefersforthatresulttobecloseto10yearsinstead.Therefore,theycouldmakesuitableallocationchangestotheirportfoliotoincreasetheinvestment'sgrowthrate.Theruleisultimatelyacceptedasthewaytomanagevariousexponentialgrowthconceptswithouthavingtousecomplexmathematicalprocedures.Typically,itisrelatedtotheitemswithinthefinancialsectortoexaminetheinvestmentanditspotentialgrowthrate.Whenthenumber"70"isdividedbytheexpectedannualrateofgrowthorthereturnonfinancialtransactions,theestimateinyearsisproduced.LimitationsfortheRuleof70Typically,theruleof70worksverywell.However,theanswerreceivedisn'tcompletelyaccurateforvariousreasons.Forone,itassumesthatsomethingiscompoundedcontinuously.Therefore,theinterestisconstantlycalculatedandthenaddedtotheaccount.Mostsavingsaccountsendupcompoundinginterestmonthlyinsteadofconstantly.EvenaregularCDisonlycompoundedonceamonth,soit'snottrulycontinuous.Thishappensbecausethere'susuallyasetinterestrate,andtheinvestordoesn'ttouchitfortheterm'slength.Withthat,theruleof70slightlyunderestimateshowmanyyearsittakesfortheittogrow.Thedifferenceisn'tnoticeablewithasmallannualgrowthrate,butitbecomesapparentwhendealingwithhigherrates,suchas10percentormore.Thisissignificantiftheinvestorisestimatinginvestmentgrowth,suchasmutualfundsorstocks.Changingtheaccountbalancecanalsochangethosecalculations,especiallyiftherearelargewithdrawalsordepositswithinthetimeperiod.Theruleof70assumesaconstantgrowthratefortheinvestment'slifespan.Mostsavingsaccountsaren'tgoingtochangetheinterestrate,butthatcanhappen.Yearafteryear,aninvestmentorstockportfoliocanhaveadifferentannualrateofgrowthandreturn.Therefore,it'snearlyimpossibletopredictitforthenextyear.It'sbesttorecalculateregularlyastheannualrateofreturnchanges.Inasense,theruleof70andtherulestodoubleitincludeestimatesofthegrowthratesorratesofreturnoninvestments.Therefore,inaccurateresultsarepossible.ConsiderationsforRules69and72Sometimes,peoplecanusetheruleof69andtheruleof72.Thefunctionissimilarfortheseaswiththeruleof70.However,ituses69or72inplaceof70forthecalculations.Ultimately,theruleof69ismoreaccuratewhenfocusedoncontinuouscompoundingdoubletime.Still,72mightbemoreaccurateforcompoundingintervalsthathappenlessfrequently.Thereisavariousnumberofyearsthatcanbeusedfordoublingtime.OtherApplicationsfortheRuleof70Theruleof70hasotherusefulapplications,aswell.Itispossibletodeterminehowlongitmighttakeforacountry'srealGDP(grossdomesticproduct)todouble.Thisissimilartocalculatethecompoundinterestrates.UsetheGDPgrowthrateasthedivisorfortheruleof70.Forexample,thegrowthrateinChinaisat10percent.Withtheruleof70,itpredictsthatitmighttakesevenyearsfortherealGDPinChinatodouble(70/10).Ruleof70vs.RealGrowthItisessentialtorememberthatthisruleof70isjustanestimatebasedonvariousforecastedgrowthrates.Ifthegrowthratefluctuates,theoriginalcalculationmightprovetobeinaccurate.TheUSpopulationwasestimatedatjust161millionin1953.In2015,itdoublesto321million.Thegrowthratein1953waslistedasjust1.66percent.Withtheruleof70,thepopulationshouldhavedoubledby1995.Sincetherewerechangestothegrowthrate,itloweredtheaveragerate,sotheruleof70wasinaccurate.Thoughtheruleof70isn'tapreciseestimate,theequationdoesprovidesomeguidancewhenhandlingcompoundinginterestissuesandexponentialgrowth.Thatcanbeappliedtoanyinstrumentthatseessteadygrowthexpectedforthefutureandthelong-term.Forexample,populationgrowthwithtimeisagreatone.However,theruleof70isn'tappliedwellforinstanceswheregrowthratesareanticipatedtovarysignificantly.TakeawaysSoFarTheruleof70isagreatcalculationtofindouthowmanyyearsitmighttakefortheinvestmentvaluetodouble,givenaparticularrateofreturn.Investorsoftenusethismetrictoevaluateaninvestmenttofindoutwhenitmightdouble.Thisincludesmutualfundreturnsandgrowthratesforretirementportfolios.Rememberthattheruleof70isjustanestimatebasedontheforecastedgrowthratewithtime.Iftheseratesfluctuate,theoriginalcalculationmademightbeinaccurate.ExamplesfortheRuleof70Aninvestorwantstoreviewtheirretirementportfoliotodeterminehowlongitmighttaketodoubleit,giventhevariousratesofreturn.Theinvestmentoptionsmadecanbeusefulforfuturevalueandarerelatedtogrowthrates.Herearevariouscalculationsonthisrulebasedondifferentgrowthrates:Witha3percentgrowthrate,itcouldtake23.3yearsforaportfoliotodouble(70/3).Witha5percentgrowthrate,ittakes14yearstodouble(70/5).Withan8percentgrowthrate,ittakes8.75yearstodouble(70/8).Witha10percentgrowthrate,ittakessevenyearstodouble(70/10).Witha12percentgrowthrate,ittakes5.8yearstodouble(70/12).TheDifferenceBetweentheRuleof70andCompoundInterestCompoundinterestiscalculatedfromtheinitialprincipal.Thisincludesaccumulatedinterestfrompreviousperiodsontheloanordeposit.Typically,therateforcompoundinterestdependsonitsfrequency.Whenthenumberofcompoundingperiodsishigher,thereismorecompoundinterestonthefutureinvestment.Itisessentialtocalculatethecompoundinterestfordoublingtime.Thatway,thenumberofyearsisknown,andsoisthevalueoftheinvestment.Ultimately,withthisrule,theinvestmentdoublesinsizedependingonhowtheinterestiscompounded.BottomLineforMinimizingInvestmentTaxesThebottomlinehereisthatpeoplemusttakeastrategicapproachtoinvestingtomaximizeretirementincomeandminimizetaxes.Inmostcases,theinvestmentcanseegreatreturns,butit'shardtodeterminedoublingtimewithoutusingtheruleof70.It'sagoodideatogetapersonalfinancialadvisortohelp,especiallywheninvestingalargesumsuchas$200,000.Itcouldbestressfulwonderinghowtoinvest200kandtheycanhelpwiththatstress.Withthat,theyshouldnottakecommissionsorbegivenfinancialincentives.Thatway,thepersonaladvisorisontheinvestor'ssideandisn'tjustouttomakemoney.Sometimes,investorscangetafreeconsultationwithapersonalfinancialadvisor.Thatway,theydetermineifthatpersonistherightfit.Thoughit'sgoodtofindpersonalserviceatalowprice,itisessentialtochoosesomeonewhocaresaboutyouandofferstheservicesrequired.Economicsplaysahugepartintheworldrightnow,andpersonalfinanceisessential.Growinganesteggisn'teasy.However,withpracticeandtherightinsights,growingpersonalfinancesisapossibility.Whilemathmightnotastrongsuitformostpeople,theworldoffinanceisnotgoingaway.Practicefrugalmoney-savingtips,investwiththerightcompaniesforthebestresults,andeducateyourselfonfinancialtermssuchasnominalfee.Disclosures:SecuritiesofferedthroughLPLFinancial,memberFINRA/SIPC.InvestmentadviceofferedthroughStratosWealthPartners,LTD.,aregisteredinvestmentadvisor.StratosWealthPartners,LRD.TheKelleyFinancialGroup,LLCareseparateentitiesfromLPLFinancial.Thisinformationisnotintendedtobeasubstituteforspecificindividualizedtaxorlegaladvice.Wesuggestthatyoudiscussyourspecificsituationwithaqualifiedtaxorlegaladvisor.Contentinthismaterialisforgeneralinformationonlyandnotintendedtoprovidespecificadviceorrecommendationsforanyindividual.Thecontentisdevelopedfromsourcesbelievedtobeprovidingaccurateinformation.Noinvestmentstrategyassuresaprofitorprotectsagainstloss.Investinginmutualfundsinvolvesrisk,includingpossiblelossofprinciple.FundValuewillfluctuatewithmarketconditionsanditmaynotachieveitsinvestmentobjective.Thereisnoguaranteethatadiversifiedportfoliowillenhanceoverallreturnsoroutperformanon-diversifiedportfolio.Diversificationdoesnotprotectagainstmarketrisk.TheStandard&Poor’s500Indexisacapitalizationweightedindexof500stocksdesignedtomeasureperformanceofthebroaddomesticeconomythroughchangesintheaggregatemarketvalueof500stocksrepresentingallmajorindustries.ContributionstoatraditionalIRAmaybetaxdeductibleinthecontributionyear,withcurrentincometaxdueatwithdrawal.Withdrawalpriortoage59½mayresultina10%IRSpenaltytaxinadditiontocurrentincometax.ARothIRAofferstaxdeferralonanyearningsintheaccount.Qualifiedwithdrawalsofearningsfromtheaccountaretax-free.Withdrawalsofearningsfromtheaccountaretax-free.Withdrawalsofearningspriorto59½orpriortotheaccountbeingopenedfor5years,whicheverislater,mayresultina10%penaltytax.Limitationsandrestrictionsmayapply.Thepricesofsmallandmid-capstocksaregenerallymorevolatilethanlargecapstocks.Internationalinvestinginvolvesspecialriskssuchascurrencyfluctuationandpoliticalinstabilityandmaynotbesuitableforallinvestors.Themarketvalueofcorporatebondswillfluctuate,andifthebondissoldpriortomaturity,theinvestorsyieldmaydifferfromtheadvertisedyield.GovernmentbondsandTreasurybillsareguaranteedbytheUSgovernmentastothetimelypaymentofprincipalandinterestand,ifheldtomaturity,offerafixedrateorreturnandfixedprincipalvalue.Municipalbondsaresubjecttoavailabilityandchangeinprice.Theyaresubjecttomarketandinterestrateriskifsoldpriortomaturity.Bondvalueswilldeclineasinterestratesrise.Interestincomemaybesubjecttothealternativeminimumtax.Municipalbondsarefederallytaxfreebutotherstateandlocaltaxesmayapply.Ifsoldpriortomaturity,capitalgainstaxcouldapply.ETFstradelikestocks,aresubjecttoinvestmentrisk,fluctuateinmarketvalue,andmaytradeatpricesaboveorbelowtheETF’snetassetvalue(NAV).Uponredemption,thevalueoffundsharesmaybeworthmoreorlessthantheiroriginalcost.ETFscarryadditionalriskssuchasnotbeingdiversified,possibletradinghalts,andindextrackingerrors.Investing0viewsPostnotmarkedasliked