Read the title of this post again.This post will not help you to retire in 2 minutes. But in less than 2 minutes, it will tell you how long will it take for you to retire. And that too without having to make any big and complex calculations.
And you can do it yourself!
But for you to do it, you need to be familiar with TheRule of 72
What is Rule of 72?
|Rule of 72 | Calculate Time Required To Double Your Money|
For example, if you want to know how long will it take to double your money at 12% interest, divide 72 by 12. The result is 6. And this 6 is the number of years required to double your money. It is as simple as that.
Lets take another example: At 8% interest, which is the average rate offered by banks for keeping your money in recurring deposits and fixed deposits, your money would double in 9 years. (How: 72 / 8 = 9 Years)
Note – This rule is applicable only for compound interests and not simple interests. Also it works better for smaller numbers.
Lets go further..
How to Use This Rule of 72 for Retirement-Years Calculation?
Please note that this post does not tell you about the amount required for your retirement. But this neat little number trick will tell you the (approximate) number of years required to reach that amount.
Let us suppose that you need Rs 2 crore as your retirement corpus. And as on date, you have a saving of Rs 6.25 lacs.
Note – I have chosen this strange figure of 6.25 to make further calculations easy.
The assumption here is that you are a rational human being, who doesn’t want to take too many risks with his retirement kitty. And neither do you want to earn comparatively lower returns offered by bank deposits.
So you decide to take a middle path of 10%.
This is higher than 8% offered by National Savings Certificates and bank deposits and and lower than 12% plus offered by inherently risky stock markets.
Now lets back calculate…i.e., starting from the final retirement requirement of Rs 2 Crore.
Mathematically, 72 divided by 10 is 7.20
Now if we get 10% per year for our investments, it will take 7.2 years to double our money. (Using Rule of 72, we know that 72 divided by 10 equals 7.2 years)
Now to double your money from an amount X to Rs 2 Crore, it will require the amount X to be 1 Crore. And using the Rule of 72, we have that Rs 1 Cr doubles to Rs 2 Cr in 7.2 years, i.e
1 Cr to 2 Cr = 7.2 years
50 Lacs to 1 Cr = 7.2 years (Total: 14.4 years)
And so on..
And the calculation continues as follows:
This simply means that starting from Rs 6.25 Lacs, it will take you 36 years to convert it into Rs 2 Cr, which is the target amount.
I know you must be thinking that 36 years is too long for anyone to keep saving. But here is the magic. Did you notice that you started from Rs 6.25 Lacs? And you ended being a Crorepati, twice over.
But you did not put in any new money in these 36 years!!
Yes. You need to understand that it takes 36 years to convert Rs 6.25 Lacs to Rs 2 Crore without any additional investment and without doing anything in stock markets. 🙂
That is the power of starting early, when it comes to investing.
The above example is a very simple and basic usage of this Rule of 72.
So in case you decide to make additional investments every year, you can reach the target of Rs 2 Cr much earlier than 36 years.
For example, if you additionally invest Rs 1 Lac every year, then you can reach the goal by 27th Year.
And if you somehow manage to save Rs 2 Lac every year, then you can reach your goal in less than 23 years!!
Try doing 3 Lacs an year and you will retire in less than 20 years. Doing 3 lacs an year means doing 25,000 every month. And if you earn decently, then saving this amount every month towards your retirement should not be very tough.
Warning: This exercise to calculate these numbers for your own retirement can be a scary one. But it clearly illustrates that if you decide that instead of going for one time investment, you are ready to contribute regularly to your retirement fund, then you can drastically reduce the time required to reach your retirement target amount.
So how much are you targeting to save for your retirement? And how much time will it take?