If you have an investment, or are worried about inflation, you probably assume that there is probably a fairly complex equation—or even set of equations—to figure how long it takes for your investment to double or how inflation will chip away at your nest egg. You are correct, there is. But there is a simpler way to do it, too.
What is the Rule of 72?
This is a time value of money calculation. The “Rule of 72” is a rough-and-ready way to estimate the amount of time your investment will take to double when you know the fixed rate of return. The simple equation is:
72 ÷ (compound interest rate) = years to double
For example, 72 ÷ 6% / 8% / 10% = 12yrs / 9yrs / 7.2 years to double your investment.
The Rule of 72 is a good tool to estimate what rate of return you will need if you have a timeline in mind where you want to double your investment or are looking retire by a certain age.*
The opposite is true, too. The same equation will show you how many years it will take for inflation to cut your money in half—which for a set amount of money, like a structured settlement annuity, can be extremely helpful—and eye opening.
72 ÷ (inflation rate) = years to half
Inflation over the last 10 years (2005-2014) has averaged 2.28%. This means that if this average stays consistent, the value of your money will half in around 32 years (31.6 years).
It is important to note that something as simple as a 1% change in an inflation rate (from the 2.28% to 3.28%) can have a big impact on the value of your money. The time taken for the value of your money to half drops to 22 years (21.9 years).
Inflation Rates Vary
Unlike your structured settlement annuity, inflation rates change frequently. This can directly affect the value of your periodic payments in the future. It is one of the factors that annuitants should take into account making the decision to sell portions or all of their structured settlements.
If you have questions about using your structured settlement or lottery prize to take advantage of an opportunity or address an immediate need, contact one of Your Trusted Source’s specialists at SenecaOne on (800) 513-1394. A friendly professional will discuss and personalize your options.