Applying the rule of 72 to my historical gains. 16 February at 6:27AM in Pensions, annuities & retirement planning 5 replies 534 views

Workerdrone

Past performance being no guide to future returns and all, I just thought I'd try this little exercise for fun. I have an old pension pot which I'd not added to since 2004, so I thought I'd plot its progress on a simple line graph. Fees are < 1%.

I was pleasantly surprised to actually see the much mentioned compound effect showing the line pretty closely matching the exponential trend line over 21 years. The was a bit of positive deviation during covid (heavy in tech), then a downturn at the end due to last years higher interest rates but all in all I see a rough doubling of the pot every 7 years.

Not that I take this to mean anything for future returns, but it does give a nice fuzzy feeling that the maths actually does work when applied to your own figures.

ader42

Nice. Some are saying to expect lower returns going forward for a while, but even a 7% return will mean a doubling every 10 years  

I can’t wait to start putting money in my sons SIPP for him and start watching. 

Workerdrone

ader42 said:

Nice. Some are saying to expect lower returns going forward for a while, but even a 7% return will mean a doubling every 10 years  

I can’t wait to start putting money in my sons SIPP for him and start watching. 

Done that the past 3 years but nothing inspiring to show my two hence at least I can give a real world example for encouragement

Secret2ndAccount

Since the OP makes no mention of the Rule of 72, I will for the benefit of those who don’t know.

The Rule of 72 relates to compound interest and the time it takes for an investment to double.

If an investment earns 8% interest and is left untouched, it will double in about 9 years. 8 x 9 = 72

“If I earn 6%,how long will it take to double my money?” 72 / 6 = 12. So it will take 12 years.

“If I want to double my money in 4 years, what growth rate do I need to achieve?” 72 / 4 = 18. So you need to achieve 18% compound growth.

Simples

In the OP's case, his pot is doubling every 7 years, so he is averaging just over 10% growth.

JohnWinder

Handy. Some people would find that more appealing than using the calculator on your phone, but to use the phone, you simply press the ‘2’ button (for doubling of your investment), ‘y root of x’ button, ‘7’ button (for the number of years of growth), ‘equals’ button, ‘minus’ button, ‘1’ button, ‘equals’ button. Answer: 10.4%.
Why bother if you have the rule of 72? Because now your phone will do tripling growth, or 4.5 times growth, or 17 years of growth.

Workerdrone

Secret2ndAccount said:

Since the OP makes no mention of the Rule of 72, I will for the benefit of those who don’t know.

The Rule of 72 relates to compound interest and the time it takes for an investment to double.

If an investment earns 8% interest and is left untouched, it will double in about 9 years. 8 x 9 = 72

“If I earn 6%,how long will it take to double my money?” 72 / 6 = 12. So it will take 12 years.

“If I want to double my money in 4 years, what growth rate do I need to achieve?” 72 / 4 = 18. So you need to achieve 18% compound growth.

SimplesIn the OP's case, his pot is doubling every 7 years, so he is averaging just over 10% growth.

That's pretty much bang on to what I averaged, after I took my annual fees into account. Using an online compound interest calculator, with what I have and will put in over the next 13.5 years, I now only need 7.85% average growth after fees to hit my retirement target. It's nice to have a plan.