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What is the Rule of 72?

One of the hardest factors in planning for retirement is trying to accurately judge how much money you will need to live on in the future. Because of inflation, what you can afford today you might not be able to afford when you retire. Unfortunately, there is no way to predict what inflation rates will be in the future.

A good rule of thumb in figuring out your future purchasing power is to use the “Rule of 72”. This is a formula that will help you calculate what you can expect to spend on consumer goods in the future. Here’s how it works.

Divide 72 by the inflation rate to see how many years it will take for the cost of something to double. So, 72 divided by 4 (we’ll use 4% for the inflation rate, even though it’s averaged about 3.5% over the last several decades) equals 18. So, in 18 years the price of goods would be expected to double. For example, say you are buying a pair of shoes today for $50, according to the “Rule of 72” the same pair of shoes will cost you $100 in 18 years.

Take a few moments and calculate what some of your expenses would be sown the road. It can be a real eye-opener as to what your retirement picture will look like.