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The Rule Of 72

Kaight
  |     |   1,192 posts since 2011

You already know the rule, but perhaps it has escaped your attention or slipped your mind. For savers generally and for retirees in particular:

It turns out the number "72" is divisible by 6 with a convenient integer outcome. Thus, for example:

If you happen to be a retiree aged 65 with a $1,000,000 nestegg of 2023 dollars, the purchasing power of your nestegg when you reach age 77 will be half what it is today if inflation holds at 6%. Oh, sure, you're invested in 5.5% APY CDs and your million will grow. But you also face taxation and living expenses. So good luck!

Fact is no mention of any US dollar amount today is sensible absent specifying the reference year. A "millionaire" back in 1960 was a rather wealthy person. Today? Much less so. It's not the dollar number that matters, it's the purchasing power of those dollars, however many you have. And today that purchasing power is escaping like the air out of an over-inflated balloon, as the Fed continues to print new dollars, created from whole cloth, as fast as they can.

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jamesstewart
  |     |   64 posts since 2011
Compare this to the ZIRP years when the $1,000,000 nest egg earned $10,000/year with lower inflation. I'll take the current situation.
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NFO
  |     |   66 posts since 2022
You're imagining a condition that has never existed, even in 1970/80s. If inflation runs that high over that long, what's to say that you can't get a 6-7% (or more) return? Taxation and living expenses exist regardless of the inflation rate, and tax brackets are adjusted for inflation.

I'm not saying that inflation isn't a huge problem, but you're having a bit of a fever dream here. Most would crawl over hot coals to have $1M in the bank at age 65. Combined with other assets that anyone with that kind of savings balance usually has, and any other pension income sources, a person can live comfortably.
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Ally6770
  |     |   4,310 posts since 2010
With high interest like we have now, this is the only time I do not bother with laddering (because I have been combining them) but doing CD's all long term CD's and I continue with that. But I now have a lot maturing every 5 to 7 years. Even the ones I have purchased the last few months, interest rates are higher on short term but still I purchased 5 to 7 year CD's and had the last 10 yr CD's matured last year I think it was, and would have gone out longer if I could have for the same rate. I am at the top of my interest income now without IRMAA making my Medicare premium go up. but if we have deflation or a major recession will have to cash one in to keep from paying because of IRMAA. This is what we have done since the late 70's. In the 90's I discovered Ken and he made chasing rates so much easier. Now since the 2,000's it is IRMAA I worry about and is something I keep in mind. In the past since the late 70's and 80's when I went back to work, every 5 to 7 years there has been a market crash every few years after a tax cut. I tried to ladder my CD's for this time. For the rest of this year I only have IRA's that will mature for the rest of this year and will go out on those also as far as I can, even if rates go down. All my Regular CD's have been bought now since DEC. For us, doing it this way we usually made the timing to get the crashes and higher rates. Everyone has to do what they are comfortable with and what is best for their family and situation. Just do not borrow except for your first house and first car and get them paid off as fast as you can. Make your money work for you all of the time while keeping in mind your future needs. By doing things this way we have been able to have high interest on our CD's when inflation went down. The way we budgeted when first married at 18 and 20 was for 4 weeks in every month and the 5th was for an extra amount on the truck then when that was paid off it went on the house. We at that young age had saved 30% down payment on our first house. We always lived on my husband's paycheck and mine went on the principal of the house every Friday.
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