The Rule of 70 formula is a simple equation to calculate how many years it will take for something to double in value. It’s used when calculating things like gross domestic product (GDP), population growth, and investment growth rate. For those looking to see how long their investment or retirement portfolio will take to double in value, the rule of 70 is an easy and accessible way to measure.
When reviewing potential investments for your retirement portfolio, you may have heard investment advisors mention the “Rule of 70.” Though a simple calculation, the Rule of 70 is an important tool you can use to estimate when the value of your investment will double. However, the Rule of 70 relies upon estimation and assumptions, which don’t always hold true in this complex and ever-changing world.
In this article, we’ll discuss the Rule of 70 formula, how you can use the rule in your own investments, and what other rules may come in handy during your calculations.
Understanding the Rule of 70
The rule of 70 is a simple equation of determining how many years it will take for your investment to double in value. Though the rule can only provide a rough idea, it’s also a valuable tool that investors rely on to estimate increases in value within retirement investments, mutual fund returns, and even investments with exponential growth.
How do you calculate the rule of 70?
You calculate the rule of 70 by dividing the number 70 by the predicted average yearly growth rate of a stock or portfolio, giving you a number of years. This number is the time it will take for an investment to double in value.
This equation is particularly useful for planning things like the performance of retirement portfolios where you can assume a consistent growth rate over a period of time. Take this, for example.
|Annual growth rate||Years to double|
This table assumes different growth rates for a portfolio, at annual growth rates of 5%, 8%, and 12%. Using the rule of 70 you can calculate the number of years it will take for your investment to double in value.
How can the Rule of 70 help you?
This rule is helpful to many investors, especially those with retirement investments. When planning for retirement, you typically have an age in mind at which you would like to retire. Therefore, you can use this equation to ascertain a rough idea of the annual growth rate and compounded growth you need over time.
- Aggressive growth. Are you hoping to retire within the next ten years? Then you may need a more aggressive portfolio. You can see that if you achieve a growth rate of 12%, you should be able to double it in around six years.
- Safe growth. Maybe you’re risk-averse and you’re planning to retire in a few decades instead. In that case, you can opt for a safe and standard growth rate with the interest calculated at around 5%. At this rate, your portfolio will double in about 15 years.
As you can see from the above examples, you must factor in your investor profile when you compare investments. A person who is 50 needs to gain money quicker, and thus should probably look at a more aggressive portfolio. However, a person who is 25 can invest much more carefully while avoiding risk. Since they have plenty of time for retirement, 15 years to double the value seems more than doable.
If you’re having trouble determining which type of portfolio will suit your needs, you may want to reach out to an investment advisor. Your advisor can point you in the right direction depending on your growth desires.
How do the rules of 69 and 72 differ?
While they sound similar to the Rule of 70, these rules provide better estimations for different kinds of investments. In both cases, you can use the same calculation listed above and replace 70 with either 69 or 72.
- Rule of 69. Many investors consider this rule better for calculating the time for annual compound interest rates. The key here is that the interest rate continues to compound annually at a stable rate. If you can achieve something like this, the time for you to compound and accumulate interest in order to double it will be less than the Rule of 70.
- Rule of 72. This rule is considered a superior method for calculating fixed annual interest rates. The key here is that the rate will yield the same amount on an annual basis. In this scenario, it will take a little bit longer than the Rule of 70 to achieve double the value.
|Rule of 69||Rule of 72|
|Annual growth rate||Years to double||Annual growth rate||Years to double|
|5%||13.8 years||5%||14.4 years|
|8%||8.625 years||8%||9 years|
|12%||5.75 years||12%||6 years|
The Rule of 70 in other contexts
Though useful to calculate doubling time in financial investments, the Rule of 70 can also be used to calculate other forms of growth over time.
- Population growth rate. You can use the same formula listed above to calculate the estimated number of years it would take for a country’s population to double. However, because population growth is subject to multiple outside factors (such as China’s one-family, one-child policy), this rule can only provide an estimate rather than an accurate calculation.
- GDP growth rate. In addition to estimating population growth, the Rule of 70 can be used to approximate the number of years it would take for a country’s GDP to double. For instance, the U.S. had a GDP of $22.99 trillion in 2021 and $20.94 trillion in 2020. That’s a growth rate of about 9.8%. Using the Rule of 70, we can estimate that it would take about 7.14 years to double the U.S. GDP (assuming the growth rate remains the same).
Real growth compared to the Rule of 70
The bottom line is that the Rule of 70, although extremely useful, only provides rough estimates. In this sense, it’s like most models. It does not take into account unforeseen events or knowledge that we do not yet know.
For instance, let’s revisit the U.S. In 1966, the U.S. had a population of approximately 196.6 million. The following year, the U.S.’s population was about 198.7 million. Using the Rule of 70, we can estimate that the growth rate was 2.1%, meaning the U.S. population should approximately double after about 33.3 years.
Except that’s not what happened. In fact, the U.S. population isn’t expected to surpass 400 million people until 2058. Although it’s more of a rough estimate used primarily in the financial sector, the rule of 70 works well to give you an idea of potential growth and what you need to achieve.
- The Rule of 70 is an equation that allows you to estimate how long it will take for an investment to double with a steady annual growth rate.
- Both the rules of 69 and 72 are related to the Rule of 70, which are respectively used to calculate compound interest and annual yield.
- The Rule of 70 works best in calculating retirement portfolios, mutual funds, and investments with exponential growth.
- Though the Rule of 70 can also be used to estimate GDP and population growth, it doesn’t take into account unforeseen events or knowledge.
- Despite its other uses, this rule is best used for investment. This is because you can use the historical rate of the stock market for comparison.
View Article Sources
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- Saving and Investing — Office of Investor Education and Advocacy
- How To Invest In The Stock Market: 8 Basic Concepts — SuperMoney
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