Using the Rule of 72 to Predict How Much You Need to Retire

Previously, I demonstrated a way to calculate your retirement needs. Now I am going to show you how to use a popular math trick, e.g., the Rule of 72, along with some historical inflation data, to give you a quick way to estimate the annual income needed for a comfortable retirement.

Historical Inflation Rate

Here are some quick factoids:

• From 1913 to 2006 U.S. inflation rate averaged 3.4%
• From 1996 to 2006 U.S. inflation rate averaged 2.5%, slightly lower than the longer term average
• 10 consecutive years with the highest inflation rate was between 1973-1982 at 8.8%
• 10 consecutive years with the lowest inflation rate was between 1924-1933 at -2.6% (period spanning the Great Depression)

Using Math Rules to Predict Your Retirement Needs

Using the Rule of 72 and the Rule of 115 and inflation rate of 3.4%, we can estimate that:

• We need 2x our current income to retire in 21 years (72 / 3.4 = 21)
• We need 3x our current income to retire in 34 years (115 / 3.4 = 34)
• We need 4x our current income to retire in 42 years (72 / 3.4, twice)

Another thing to consider is calculating based on your current income might not be the best method. A better way to do the estimate is to base it off your current estimated annual living expense — specifically, picture yourself retiring today, how much money do you think you need? The reason the expense method is better than the income method is simple — some people make \$50,000 a year and could live on \$25,000, and some people make over \$100,000 but spend more than that every year.

If you don’t have a good idea on how to estimate your expenses, you can apply the 80% rule. The 80% rule simply estimates that you will need about 80% of your pre-retirement income to live comfortably in your retirement, which will lower your retirement needs by a bit.

More about math rules, inflation, and retirement needs:

By , on Dec 23, 2011
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

Leave Your Comment (One Comment)

1. David Sneen says:

There are tons of factors to consider when contemplating how large your retirement nest egg should be. Inflation prospects is certainly one of the major concerns. Thank you for the valuable information.

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