A Simple Math Formula That Can Help Measure Retirement Progress

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The Rule of 72 is a straightforward formula used to estimate how long it may take for an investment portfolio to double, showing the impact of compound growth. It can be a helpful benchmark for figuring out how quickly money might grow at a given annual return, but it is only an estimate, not a guarantee.

Building wealth still depends on regularly saving and adding to investment accounts.

How the formula works

To estimate the number of years it takes for money to double, divide 72 by the expected rate of return. For example, if the anticipated annual return is 6%, the calculation is:

72 / 6 = 12

That means it would take about 12 years for a portfolio to double with a 6% average annual return. A higher return can shorten that timeline. For example, an 8% average annual return would produce a faster result:

72 / 8 = 9

In that case, moving from a 6% annualized return to an 8% annualized return would make it possible to double money three years sooner.

Why compounding matters

Compound interest is interest earned on interest. It may start slowly, but it becomes increasingly powerful as a portfolio grows.

For example, if $1,000 earns 7% in a year, it grows to $1,070. In the next year, that 7% is applied to $1,070, bringing the total to $1,145.

Reinvesting dividends and interest payments can help those earnings compound over time.

Reducing fees and taxes

Even with compound growth, fees can reduce returns. Mutual funds and exchange-traded funds, or ETFs, charge expense ratios, which represent the cost of managing the fund. Many ETFs that track market benchmarks such as the S&P 500 have expense ratios below 0.10%, while some actively managed funds charge 1% or more, which can significantly affect performance.

If an ETF earns an annualized 8% return but has a 1% expense ratio, the investor is effectively left with a 7% return. Instead of doubling money in nine years, that lower return would stretch the timeline to about 10 years.

Taxes can also reduce gains if a fund distributes cash that is taxed as ordinary income. For that reason, investors may prefer an index fund with a low expense ratio and distributions that are not treated as ordinary income.

Applying the rule

The Rule of 72 can be used to estimate how long it may take a portfolio to double by using a fund’s historical returns as a guide for future annualized returns, while remembering that past performance does not guarantee future results. Having a rough estimate of doubling time can also support retirement planning goals.