There's a shorthand investing calculation known as the Rule of 72. For typical rates of expected investment returns, it can help you see how long it will take your money to double. To use it, you divide 72 by the rate of return you anticipate earning, expressed as a number. For instance, if you think you will earn a 9% annual rate of return, the rule of 72 would estimate that your money would double in eight years, dividing 72 by 9 to get eight.
That Rule of 72 guideline is key to helping you understand how to turn $10,000 into $160,000 by the time you retire. After all, the only thing you need to do to make that math work is for your money to double four times -- from $10,000 to $20,000 to $40,000 to $80,000 and finally to $160,000. At that 9% annual rate of return -- around the market's long-term historical average -- it would take around 32 years (8 multiplied by 4 to get 32) for that doubling math to work its magic for you.
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You might even be able to do better than that!
The beauty of this doubling math is that as long as the market keeps delivering long-term compound growth at that same rate, your money can keep doubling. If you start early enough in your career (or work long enough), you might even get in another doubling cycle, which would turn that initial $10,000 into $320,000.
Plus, who says you should only invest once? Every dollar you invest could compound over time, taking advantage of the potential repeated doubling that the Rule of 72 projects. Instead of a one-time $10,000 investment, each of a series of investments throughout your career can compound on your behalf. It's a straightforward approach, and it's not hard to see how it could turn your regular investments into a full-fledged $1 million portfolio (or more) by the time you retire.
Use your 401(k) to make it a reality
While $10,000 might be a larger investment than most of us can come up with all at once, there are no rules that say you have to save such a large lump sum in order to invest. Indeed, you might have a wonderful tool already at your disposal that makes it easy to invest, courtesy of your boss. That tool is your 401(k) or similar employer-sponsored retirement plan.
With your 401(k), you can have money invested directly from your paycheck, in a tax-advantaged way, for your retirement. If you're under age 50, you are allowed to save as much as $20,500 per year in your 401(k), and if you're age 50 or up, that limit increases to $27,000.
Typically, 401(k) contributions come out of every paycheck. Say you get paid every two weeks (26 times per year). If you want to contribute $10,000 to your 401(k) over the course of a year, you could set your contribution to $385 per paycheck. For most of us, that's a lot easier target to reach than a $10,000 lump sum, yet over the course of a year, it adds up.
Of course, getting money into your 401(k) is only half the challenge. The other half is investing it effectively. Fortunately, there's a straightforward investment available in many 401(k)s that tends to beat most of Wall Street's best and brightest, year after year. That investment is a low-cost, broad-market index fund.
In such a fund, you get returns that pretty much match the market, aside from a very modest fee. Based on history, that puts the returns it takes to enable repeated doubling to turn $10,000 into $160,000 over the course of a career within the realm of possible. Nothing in the market is guaranteed, of course, but it's good to know that there's such a straightforward path to give you a great chance of getting there.
Get started now
No matter how you invest, time is your greatest asset when it comes to building a comfortable nest egg. If you want to turn $10,000 into $160,000 (or more) by the time you retire, you'll need to invest long enough for your money to double four times. The sooner you get started, the more time you'll have on your side to make it a reality. So get started now, and give yourself your best available shot to see those kinds of epic returns for yourself.
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July 05, 2022 at 04:30PM
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How to Turn $10,000 Into $160,000 by the Time You Retire - The Motley Fool
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