First we'll explain the Rule of 72. If you divide the number 72 by the rate of return on your investments the answer is the number of years it will take to double your money. If you are getting 7% annually then 72 divided by 7 equals a little over 10 so it takes 10 years to double. A 9% return divided into 72 gives us an 8-year time span to double. A 10% return needs only 7 years to double.
Now what return can reasonably be expected in our real world? Over the last 100 years or so, the United States as well as many other world stock market has returned 10 to 11% per year on average, depending whose figures one reads. We'll use the figure 10%.
Suppose at age 37 you start saving for retirement and get started with value investing. We choose a reasonable sum of 110 dollars a month. In 7 years you notice that you have accumulated 13,200 dollars. Another 7 years go by and you see that you have nearly $40,000. At the end of 21 years you have $93,000. By age 65 you notice that 28 years have gone by and you have $200,000 dollars. The rate of return kept steadily increasing. Those of you with some mathematical learnings will recognize this as an exponential rate and also as compound interest.
Also notice that 28 represents four 7-year spans, time for the first dollars to double four times. Observe that during the first 7-year period you accumulated $13,000, during the 2nd 7-year period $27,000, during the 3rd 7-year period $43,000 and during the 4th period $107,000. During the 4th period you grew eight times as much as in the first period. All without changing the amount saved, $110 per month.
You think to yourself "I wish I could have twice as much". You may have figured out where this is going. Just START 7 YEARS EARLIER. Now at the end of 35 years you have $414,000, just for starting sooner. And if you start another 7 years earlier, imagine, $846,000. You accumulate $214,000 during the fifth 7-year period and $432,000 during the sixth 7-year period. Sixteen times and thirty-two times the amount in the first 7-year period. All for the same 110 dollars a month!
Yes, I know. This would require beginning saving at age 23, a very difficult thing to do. I also realize that those people with marginal incomes just don't have money to save and also that younger people usual have lower earnings power and incomes. I'm trying to make the point that to whatever extent you can follow this start-early concept it will pay off handsomely by the time you reach retirement.
Albert Einstein wrote that he believed the most marvelous thing in the universe was compound interest. You can put it to work and double or triple your retirement savings. Save as much as you can, save regularly but most of all start as EARLY as possible.
