Using the Rule of 72 to Predict How Much You Need to Retire
, on December 23, 2011
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
The graph below shows historical inflation rate from 1913 to 2006.
Historical inflation data from InflationData.com
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)
Refining Your Estimate
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:
If you like this article, please sign up for our free weekly updates
The information on this site is strictly the author's opinion. It does NOT constitute financial, legal, or other advice of any kind. You should consult with a certified adviser for advice to your specific circumstances.
While we try to ensure that the information on this site is accurate at the time of publication, information about third party products and services do change without notice. Please visit the official site for up-to-date information.