The Way I Figure It…

Posted by Joe Bert, CFP®, AIF®

By popular request, we have provided simple formulas and tables that will assist you in figuring out certain financial planning questions:

Rule of 72

Take any rate of return and divide it into “72” to figure how may years it will take to double your money.  For instance, at 6% rate of return, $10,000 would become $20,000 in 12 years (72/6 = 12):  a ten percent rate of return would double your investment in approximately 7.2 years (72/10 = 7.2).  To take it a step further, your $10,000 would grow to approximately $40,000 in 14.4 years.  Consider a 1% CD.  Using the Rule of 72, it would take approximately 72 years for your money to double!  Actually, it’s more like 70 years.

Rule of 114

This rule is used much in the same way as the Rule of 72, but it will tell you how long it will take for your money to triple at various rates of return.  Divide the rate of return into 144 to find the number of years it will take to triple.   For instance, let’s assume al $10,000 investment at 6% annual compound interest or rate of return.  Divide 114 by 6 (114/6=19); in 19 years, your $10,000 will have grown to approximately $30,000 at the end of those 19 years.  The Rule of 144 makes rough estimates.

To Compare Taxable vs. Tax Favored Income Equivalents

To find out how much you’d have to receive in taxable income to equal a certain tax-rate of return, divide the tax-free rate of return by the complement of your marginal tax bracket.  For example, if you are in the 40% tax bracket, and could get a tax-free return of 5%, you’d divide 5% by 60%, the complement of your marginal 40% tax bracket, .05/.60 = 8.33) and would know that you’d need to receive an 8.33% taxable return in order to equal a tax-free rate of return of 5%.

To Identify The Amount Of Capital Needed to Provide a Certain Income

With this formula, you can, for example, assume a certain rate of return and calculate the amount of capital needed to provide an estimated annual income base for retirement.  Divide the annual income needed by the assumed rate of return.  For example, if you needed $50,000 a year and could assume a steady 6% rate of return, you’d divide 50,000 by .06 ($50,000/.06 = $833,000).  In this instance, an $833,000 account at 6% would provide for the needed income level of $50,000.

Retirement Cost Timer

Based on 5% interest compounded annually, the following chart indicates how much you’ll have to invest monthly in order to accumulate certain amounts by retirement.

To accumulate (at retirement age of 65) amounts of:

Age

   Years to Retirement  Months to Retirement $40,000 $60,000 $80,000 $100,000 $200,000 $500,000
25 40 480 $    27 $     40 $      53 $      67 $      134 $     335
30 35 420       36        54         72         90         180        450
35 30 360       49        73         98       122         244        610
40 25 300       68      102       136       170         340        850
45 20 240       98      147       197       246         492     1,230
50 15 180     151      225       301       376         752     1,880
55 10 120     258      386       517       646    1,292     3,230
60 5 60     588      880    1,777    1,471    2,942     7,355

To calculate the additional income you’ll need (in dollars) at retirement, based on various inflation rates. Estimate the amount of dollars (present value) you’d need if you were to retire right now.  In order to calculate the additional dollars needed to maintain that standard of living, multiply your estimated present figure by the factor provided.  For example, if you assume a $2,000 monthly retirement income is sufficient right now, an 8% inflation rate and that you have 15 years to retirement, you’d need $6,340 per month to maintain the same standard.

Inflation Rates

   Years to Retirement 5% 8% 10% 12% 15%
10 1.63 2.16 2.59 3.11 4.05
11 1.71 2.33 2.85 2.48 4.65
12 1.80 2.52 3.14 3.90 5.35
13 1.89 2.72 3.45 4.36 6.15
14 1.98 2.94 3.80 4.89 7.08
15 2.08 3.17 4.18 5.47 8.14
16 2.18 3.43 4.60 6.13 9.36
17 2.29 3.70 5.05 6.87 10.77
18 2.41 4.00 5.56 7.69 12.38
19 2.53 4.32 6.12 8.61 14.23
20 2.65 4.66 6.73 9.65 16.37
21 2.79 5.03 7.40 10.80 18.82
22 2.93 5.44 8.14 12.10 21.64
23 3.07 5.87 8.95 13.55 24.89
24 3.23 6.34 9.85 15.18 28.63
25 3.39 6.85 10.83 17.00 32.92
26 3.56 7.40 11.92 19.04 37.86
27 3.73 7.99 13.11 21.32 43.54
28 3.92 8.63 14.42 23.88 50.07
29 4.12 9.32 15.86 26.75 57.58
30 4.32 10.06 17.45 29.96 66.22
31 4.54 10.87 19.19 33.56 76.14
32 4.76 11.74 21.11 37.58 87.57
33 5.00 12.68 23.23 42.09 100.70
34 5.25 13.69 25.55 47.14 115.80
35 5.52 14.79 28.10 52.80 133.18

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