The rule of 70 explained

SnowMan

20122013 said:

interesting post, I envy you all, as you seem to understand this  and have a discussion..Would anyone mind sharing  how do you get to know what you know about the calculations? is it from being taught and/ or keep reading and learning? I ask as I would like to be able to follow posts,  usually they may seem basic to most but I find it quiet advance (one example is 'EthicsGradient' reply even though gave a breakdown of their calculations, I am still not always understand and do not know what to look up to teach myself, as it will be helpful for me to do my financial planning etc. thanks 

I came across the rule of 70 years ago (and it's derivation as an approximation using the power series expansion of ln(1+x) which is x ignoring second order and above terms when x is small) but can't remember where.

I like the using 72 divisibility idea, I can't remember coming across that before

Of course the 'power of compounding' results from it being 72 (or 70) not 100 in the numerator. What is often missed is that the increase in prices which reduces the purchasing power of savings and investments also compounds.

I guess in terms of investments if you average (geometrically) say 2% real return then your money doubles in real value in about 36 years (35 if you do it accurately) whereas if you average 3% pa your money doubles in about 24 years (or accurately 23). Make of that what you want.

InvesterJones

Of course the 'power of compounding' results from it being 72 (or 70) not 100 in the numerator. What is often missed is that the increase in prices which reduces the purchasing power of savings and investments also compounds.

I guess in terms of investments if you average (geometrically) say 2% real return then your money doubles in real value in about 36 years (35 if you do it accurately) whereas if you average 3% pa your money doubles in about 24 years (or accurately 23). Make of that what you want.

Indeed - if you want to know why people should be scared of inflation it's exactly that - but instead of thinking about doubling your investment, inflation compounding (with the same formula) shows you how quickly your assets half in value. At 4% inflation, it takes only about 18 years. Same thing for fees (to a lesser extent.. but compounding means they add up and have quite an impact in the long run).

n15h

I hadn't seen the rule of 70 before, but when I was self-learning about finances/budgeting/investing, I learnt about the rule of 72. I see videos on Youtube today where some finance channels still refer to the rule of 72.

Financial advice/guidance from Youtube should be taken with a pinch of salt, but in my view, the rule of 72 and Compound interest are things that should be taught from a young age. After all, Einstein is quoted saying Compound Interest is the 8th wonder of the world.

20122013

SnowMan said:

I came across the rule of 70 years ago (and it's derivation as an approximation using the power series expansion of ln(1+x) which is x ignoring second order and above terms when x is small) but can't remember where.

I like the using 72 divisibility idea, I can't remember coming across that before

Of course the 'power of compounding' results from it being 72 (or 70) not 100 in the numerator. What is often missed is that the increase in prices which reduces the purchasing power of savings and investments also compounds.

I guess in terms of investments if you average (geometrically) say 2% real return then your money doubles in real value in about 36 years (35 if you do it accurately) whereas if you average 3% pa your money doubles in about 24 years (or accurately 23). Make of that what you want.

This is great - I need to shift focus (to inflation more accurate then can work out how much I need) and understand  the rule of 70.. rule of 8  etc different approach including the 'power series' - pick up another useful terminology 

kempiejon

I learnt it as the rule of 72 way back in the olden days when learning was done with books.
The internet suggest that the rule of 69.3 is more accurate 72 is suited for 6 - 10% growth and is much easier to reckon.
I was chatting to a pal about growing our investment pots. The first £100k takes much longer than the next £100k and the one after that is along quite quickly; which Mmes & Mssrs internet suggest it might be the the 8 4 3 rule.

InvesterJones

20122013 said:

masonic said:

https://en.m.wikipedia.org/wiki/Half-life

Obviously here we are running it backwards to get a doubling time but the principles are the same.

It is great to have the explanation.
For retirement planning/ budget / forecast what would be the basic calculations / knowledge useful to have? 
Eg percentage, ... what terminology or phrases to use to look things up 

Retirement planning is so individual it's hard to generalise much. There's a pensions board on the forums with more useful advice, but basically you need to project how long you want your assets to last, then model how quickly they will be depleted against how quickly they will grow (if at all). https://www.retirementlivingstandards.org.uk/ has some useful information around potential costs. Remember inflation applies to costs, and investment performance applies to assets. But remember past performance is no guarantee of future (hence why general rules such as 3-4% drawdown aren't so helpful unless you are sure you're in the same environment as the data used to model them - low inflation, relatively high investment performance).

Albermarle

InvesterJones said:

20122013 said:

masonic said:

https://en.m.wikipedia.org/wiki/Half-life

Obviously here we are running it backwards to get a doubling time but the principles are the same.

It is great to have the explanation.
For retirement planning/ budget / forecast what would be the basic calculations / knowledge useful to have? 
Eg percentage, ... what terminology or phrases to use to look things up 

Retirement planning is so individual it's hard to generalise much. There's a pensions board on the forums with more useful advice, but basically you need to project how long you want your assets to last, then model how quickly they will be depleted against how quickly they will grow (if at all). https://www.retirementlivingstandards.org.uk/ has some useful information around potential costs. Remember inflation applies to costs, and investment performance applies to assets. But remember past performance is no guarantee of future (hence why general rules such as 3-4% drawdown aren't so helpful unless you are sure you're in the same environment as the data used to model them - low inflation, relatively high investment performance).

So effectively once you have calculated how long it will take for your assets to have doubled, then you have to reduce that figure by the amount of inflation in those years, to get a real figure.

westv

I've read this thread and now know I will never get that 10 mins of my life back again!

masonic

westv said:

I've read this thread and now know I will never get that 10 mins of my life back again!

To be fair, if you got to the end of the first sentence of the OP and decided to continue, you have only yourself to blame.

InvesterJones

Albermarle said:

InvesterJones said:

20122013 said:

masonic said:

https://en.m.wikipedia.org/wiki/Half-life

Obviously here we are running it backwards to get a doubling time but the principles are the same.

It is great to have the explanation.
For retirement planning/ budget / forecast what would be the basic calculations / knowledge useful to have? 
Eg percentage, ... what terminology or phrases to use to look things up 

Retirement planning is so individual it's hard to generalise much. There's a pensions board on the forums with more useful advice, but basically you need to project how long you want your assets to last, then model how quickly they will be depleted against how quickly they will grow (if at all). https://www.retirementlivingstandards.org.uk/ has some useful information around potential costs. Remember inflation applies to costs, and investment performance applies to assets. But remember past performance is no guarantee of future (hence why general rules such as 3-4% drawdown aren't so helpful unless you are sure you're in the same environment as the data used to model them - low inflation, relatively high investment performance).

So effectively once you have calculated how long it will take for your assets to have doubled, then you have to reduce that figure by the amount of inflation in those years, to get a real figure.

Easier to just use the real growth figure (=absolute growth - inflation) from the start in the doubling formula if that's your aim. My point was more about modelling how long you can remain in drawdown, since you will need to both estimate your costs in today's money most likely and then apply inflation to it to model how they change by and during retirement. But the rule of 70/72 doesn't have anything to do with that, only as a means to help you estimate what your assets might be at some future point, if for example you know that you need to double your money before retiring.