The rule of 70 is commonly used to compare investments with different annual interest rates. This makes it simple for investors to figure out how long it may be before they see similar returns on their money from each of the investments. Let’s say an investor decides to compare rates of return on the investments in their retirement portfolio to get an idea of how long it may take their savings to double. To calculate the doubling time, the investor would simply divide 70 by the annual rate of return. Here’s an example:
At a 4% growth rate, it would take 17.5 years for a portfolio to double (70/4)At a 7% growth rate, it would take 10 years to double (70/7)At an 11% growth rate, it would take 6.4 years to double (70/11)Alternate name: Doubling time
How the Rule of 70 Works
Now that you’ve seen the rule of 70 in action, let’s break down the formula so you understand how to apply the rule of 70 to your own investments. Again, calculating the rule of 70 is pretty straightforward. All you do is divide 70 by the estimated annual rate of return to find out how many years it’ll take for an investment to double in size. For the calculation to work properly, you’ll need to have at least an estimate of the investment’s annual growth or return rate.
Do I Need the Rule of 70?
Keep in mind that the rule of 70 is a rough estimate, but it can come in handy if you want a more concrete way of looking at the potential of a retirement portfolio, mutual fund, or other investment than the interest rate alone could provide. Knowing the number of years it could take to reach a desired value can help you plan which investments to choose for your retirement portfolio, for example. Let’s say you wanted to pick a precise mix of investments with the potential to grow to a certain value by the time you retire in 20 years. You could use the rule of 70 to calculate the doubling time for each investment under consideration to see if it could help you reach your savings goals by the time you retire.
Alternatives to the Rule of 70
The rule of 69 and the rule of 72 are two alternatives to the rule of 70. They differ in their accuracy for investments with different compounding frequencies (which measure how often your interest compounds). Both calculations function similarly to the rule of 70, except they divide the annual rate of return by 69 and 72, respectively, to derive the doubling time. In general, the rule of 69 is considered to be more accurate for calculating doubling time for continuously compounding intervals, especially at lower interest rates. The rule of 70 is deemed more accurate for semi-annual compounding, while the rule of 72 tends to be more accurate for annual compounding.
Pros and Cons of the Rule of 70
While the rule of 70 has some impressive benefits, it also has some downsides:
