The Rule of 72 is a simple way to estimate how long it will take for an investment to double in value based on a fixed annual rate of return.

You divide 72 by the annual rate of return to get the approximate number of years it will take for your investment to double. For instance, if you're earning an 8% annual return, it would take about nine years to double your money (72 divided by 8 equals 9).

This rule is important for wealth accumulation, especially early on, because it highlights the power of compound interest. The sooner you start investing, the more time your money has to grow and benefit from this compounding effect. This is crucial for dentists who own their practices as it can help them understand the long-term impact of their investment decisions.

Applying this rule to retirement savings, whether in a retirement plan, IRA, or taxable investment accounts, helps set realistic expectations and goals. For example, if a dentist invests in a retirement account with an expected annual return of 7%, they can anticipate their investment to double every approximately ten years. This understanding can aid in planning how much to save and invest to reach retirement goals.

It's a straightforward concept, but it powerfully demonstrates the importance of saving and investing early, allowing more time for your investments to grow and benefit from compounding interest.

Incorporating inflation into retirement planning is essential, especially when considering the lifestyle one expects in retirement. If inflation is at 3%, then we take 72 / 3% = 24 years for when today’s amount of personal spending would increase by. That means someone thinking they plan on spending $15,000 monthly after tax in today’s dollars would become $15,000 x (1 + 3%)^24 = $30,492.

As you can see, this amount sneaks up on anyone’s numbers, but we have clients going back enough to see that this is a reasonable rate and have been able to see how assumptions adjusted for this increase each year.

Another way to look at this is if $8,000,000 was needed to fund this $15,000 monthly amount today, then in 24 years (2047), it would be $16,000,000 to support the same monthly lifestyle. This shows the impact of inflation on retirement planning. Dentists must factor in inflation when calculating how much they need to save for retirement. Simply saving enough to cover today's costs won't suffice, as the cost of living will be higher in the future due to inflation. This emphasizes the importance of planning for a higher retirement savings goal to ensure they can maintain their desired lifestyle. ​

When accumulating wealth for retirement, several key assumptions must be considered to accurately determine the required wealth and annual income to sustain expenses and life expectancy. These include:

1. Inflation Rate: As discussed, inflation significantly affects the future cost of living. It's important to account for the rising cost of goods and services over time.

2. Rate of Return on Investments: Estimating the average annual return on your investments helps project the growth of your savings. This should be a realistic figure, considering the types of investments and their risk levels.

3. Life Expectancy: Longer life expectancies mean needing more savings to last through retirement. Planning for a longer retirement than you might expect is crucial to avoid outliving your savings.

4. Retirement Age: The age you plan to retire will impact how long you need to save and how long your retirement savings need to last.

5. Healthcare Costs: Healthcare expenses often increase with age and can be a significant part of retirement expenses. Estimating these costs is essential, especially as they can rise faster than general inflation.

6. Lifestyle Expectations: The type of lifestyle you wish to maintain in retirement — travel, hobbies, housing — directly influences how much income you'll need annually.

7. Tax Rates and Regulations: Future tax rates and regulations can affect the net income from retirement savings. Considering the tax implications of withdrawals from different types of accounts (e.g., 401(k), IRA, taxable accounts) is important.

8. Social Security and Other Income: Any expected income from Social Security or other sources should be factored into your overall retirement income plan. For anyone that is in the millennial and younger crowd, it is not suitable to assume any Social Security.

9. Practice Sale: Proceeds from selling dental practice and building (if applicable) net of tax.

10. Emergency Reserves: Planning for unexpected expenses or market downturns is crucial. Having a buffer can help manage unforeseen costs without significantly impacting the retirement plan.

11. Estate Planning Goals: If leaving a legacy or supporting dependents is a goal, this will affect the amount of wealth you aim to accumulate.

Considering these factors helps in creating a more robust and realistic retirement plan. It's also important to regularly review and adjust these assumptions, as personal circumstances and economic conditions can change over time.

These assumptions are the key to a successful plan, and staying dialed in and invested in the process is what makes these long-term plans as successful as possible.

If you do not have a financial plan or need stronger guidance to make long-term changes that will benefit your plan, please contact us to discuss our personal financial planning services.