The rule of 72, how many doubles do you have left?
Many of us have heard of the rule of 72, but I like many have never really used it to look at my own situation…until now..Was I paying 3% in fees or 50%?
Back in 2004 (I’m old I know) I invested some RRSP money into a segregated fund with an insurance company. I will share my view on segregated funds for another day, however the fund does guarantee at least 75% of your initial investment at maturity. The numbers look like this:
Invested funds in 2004 $15,858
Value of the fund today $20,354
Return on investment ($20,354 – $15,858) / $15,858 x 100 = 28.35% in 11 years
Well I could have done worse, and to be fair there were some really ugly years in 2008 and 2009 where the value dipped to about $10,000 but I hung in there and the fund recovered. For most of us the rule of 72 is quite simple, divide 72 by the rate of return you hope to achieve. If I bank on 10%, $10,000 will turn into $20,000 in 7.2 years (72/10=7.2), simple stuff right? I had known about this formula since a friend clued me in back in 1998 and I wish I had paid more attention back then because the older you get the more doubles you will need before retirement, if your behind that is. Clearly this RRSP illustrated above is not going to get me where I need to be so I started to look into why that was. It soon dawned on me when I realized that I was paying about 3% fees on the funds I was invested in, and after some investigation realized it was actually close to 50% of my gains! Ouch, learning that a conservative mutual fund who returned 6% a year was costing me 50% in fees, regardless of fund performance, was an eye opener.
The combination of 3 things were killing my return and preventing my doubles sooner.
A. Crappy or overly conservative investment vehicle
C. FEES, FEES, FEES!!
Could I use the rule of 72 in reverse to determine the cost of inflation and fees? You bet!
Assumption if inflation at 3%. 72/3= 24. This means that in 24 years any money I leave in my sock drawer will lose 50% of it’s value
Assumption of fees at 3%. 72/3=24. This means that in 24 years 50% of what I originally invested will be eaten away by fees. Say whaaaa?
I am 40 years old with $250,000. How do I retire at 55?
Well that is 15 years. How many doubles do you have in that time? Well with the above factors in mind, one can optimistically expect 5% a year…
5% per year 72/5= 14.4 years. One double. You have $500,000
10% per year 72/10= 7.2 years. Two doubles. You have $1,000,000
15% per year 72/15 = 4.8 years. Three doubles. You now have $2,000,000!
It’s never too late to get on the right track
I know, consistently achieving 15% a year is not an easy task, especially when the investment vehicle is crap, inflation, and fees take their toll. I highly advise cash flow real estate for this purpose and have been able to double my money in 5 years or less consistently for many years now and encourage you to look at it as an alternative. We offer a hands off, ultra lean investment vehicle to specific individuals to create win win situations and help you to get closer to that end goal safely.