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What is the Rule of 70% for Retirement?
What Is the Rule of 70 for Retirement?
The 70 rule for retirement is a calculation that investors use to estimate how long it will take for an investment to double its value. This calculation is based on a constant rate of return they receive from their deposits. By doing so, investors can adjust their investments to accumulate sufficient wealth at retirement.
The rule of 70 is ideal for investment options offering semi-annual compounding for accurate estimation. Wondering how the rule of 70 works? Read on to unravel its functioning so that you can easily use it to calculate the duration you will need and plan your finances accordingly for a worry-free retirement.
How Does the Rule of 70 Work?
Step 1: Determine Annual Rate of Return from Your Investments
The first and foremost step is determining the returns you can generate from your investments. For this, you should find out the interest rates a financial instrument offers where you have parked your funds. Determining return rates is easier if you have put your money in fixed-return assets. However, finding out these rates can be challenging for those assets with varying returns.Step 2: Divide 70 by Return Rate to Get an Estimation of Duration
Once you have found the return rate, you will have to divide 70 by that value. It will give you an approximate estimation of the time needed to double your investments. Accordingly, you can decide when to start investing in building wealth.
Hence the formula is,
Doubling time = 70 / % of growth rate
Finding these calculations complicated? Let’s understand them clearly with the help of an example:
Let’s assume that you have invested about ₹1 Lakh in Fixed Deposits that offer a return rate of 7%. Now you have to divide 70 by 7% to determine the time. So, you can easily calculate that you will need about 10 years to accumulate ₹2 Lakhs in that FD account. Accordingly, you can start your FD investments about 10 years before investments to build sufficient wealth.
Who Is Eligible for the 70 Rule?
Who Needs Rule of 70 for Retirement?
Ideally, people should start planning for their retirement in their mid-20s. It gives them sufficient time to plan investment strategies and help create wealth. During this time, they can use the 70 retirement rule to calculate how much they can invest and where to plan their retirement.
However, before using the 70 rule, you should know its pros and cons. This will allow you to reap benefits from it and, at the same time, stay aware of its limitations.
What Are the Pros and Cons of the 70 Rule for Retirement?
How can the rule of 70 benefit you? Here are some of the advantages that you can reap by using this rule:
- Ease of calculation: The steps in calculating the return rate and determining the doubling time are quite simple. Hence, operational error chances are lower even during manual calculations.
- Estimate when to start investments: Once you get the duration needed to double your investments' value, you can quickly determine when to start putting money in them to generate sufficient retirement corpus.
- Determination of the right investment mix: With this formula, you can also know the different financial instruments where you should park money for maximum returns. This way, you can put aside maximum cash for your retirement.
However, there are several limitations of the rule of 70 as well that you can note. Some of these cons include:
- Only provides you with an estimation: No matter how much you calculate or consider factors like inflation and others, you will get only an estimate and not an exact value of how much you will receive after the maturity of the investment.
- Difficult for variable interest rates: Investments you make in stock markets and mutual funds greatly depend on the market sentiments. Hence, it becomes challenging to use the rule of 70% for making those types of calculations.
- Not accurate every time: At times, you can increase your investment periodically in deposit options like recurring deposits. Hence, the results are not always accurate even though they are arithmetically error-free.
Due to these flaws associated with the rule of 70, you can sometimes take help from the alternative options available.
What Are the Alternatives to the Rule of 70 for Retirement?
There are many alternatives to the rule of 70 that you can consider during retirement planning. These usually include the rule of 69 and the rule of 72. Their functioning is similar, except that the dividends are 69 and 72, respectively. However, there are some subtle differences between the two:
- Rule of 69: This is considered one of the most accurate rules when determining investment doubling time. You can use this rule for financial instruments offering low return rates.
- Rule of 72: This formula can be used for annually compounding financial instruments. With this, you will be able to estimate the returns that you are expecting from your investments.
Monetary independence is one of the key aspects of retirement. Now that you know what the 70 percent rule for retirement is and how you can use it in planning your investments to achieve your financial goals. Thus, you will not have to look up to your spouse or kids when the monthly income flow vanishes.
FAQs About Rule of 70 for Retirement
How many years does it take to double an investment as per the rule of 70?
What is the limitation of the rule of 70 when determining doubling time?
When do we use the rule of 70 instead of the rule of 72?
Is the rule of 70 completely accurate?
Why is it important to use the rule of 70 for retirement?
How does term insurance fit into retirement planning?
Is there a life insurance product that helps with both retirement and protection?
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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