Can the “Rule of 72” Help You Retire?

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I was talking to a participant the other day, and they had a couple of different 401k account balances of previous employers. They were thinking about cashing them out because they were small balances and they didn't think it'd make much of a difference in their retirement. But, I taught them about the power of the rule of 72, and I showed them how those small account balances could be worth a lot at retirement.

And when they saw it, it blew their mind.

So, here's the thing. They have two or three small account balances at companies that they worked for in the past in their 401k, and I think it added up to somewhere around maybe $20,000 or so. So they thought, you know what, I'm just going to cash these out. But I wanted show them the math on this.

So, if they cash it out after taxes, assuming they were in a 25% tax bracket and 10% early withdrawal penalty, this would cost about 35%, right? That $20,000 after taxes was going to end up only being about $13,000. And they thought, yeah, that's not bad. But then I showed them using the power of the rule of 72, what it would be worth at retirement.

For those that don't understand, here's how it works. You take 72 and you divide it by the rate of return and it tells you how long it takes your money to double. So, for example, if they got a 10% rate of return, their money would double every 7.2 years. Right? So 72 divided by ten. And this guy was about 35 years old, so he had about 30 years before retirement.

We took the 30 years they had divided by 7.2. Remember, that's how many times it takes to double. It was going to double four times before they retired, assuming they got a 10% rate of return here.

If it double four times and they had $20,000, here is the math. If it doubled once, he would go to $40,000. Then it doubled the second time that it would go from $40,000 to $80,000. And then, if it doubled the third time, it would go from $80,000 to $160,000. And, if it doubled a fourth time, it would go from $160,000 to $320,000. Think about that for a sec.

So here's my question to them. I said, would it be better for you to take $13,000 today or would it be better for you to take $320,000 at retirement?

What do you think they chose? I sure hope they chose the ladder. No doubt. It was funny. They actually started laughing and said, "Jonathon, I had no idea what this would be worth at retirement." Then the interesting thing is, I actually helped them get all of the old money rolled over into their new 401k plan.

You know, it can be really tempting in the moment when you want to get your hands on that cash to take that withdrawal. But, it's important to sit down like that participant did with Jonathan and really evaluate the true value over time and maybe even invoke that rule of 72 to see how much your money can grow before and through retirement.

So, if you want to sit down with a member of our Superhero team at SRP and do some math before making a decision about whether to cash out or rollover, give us a call or click on the link below to schedule some time with our team. We'd be happy to connect with you.