From Gilman Miller: “You wrote recently of a couple who never earned more than $70,000 a year, yet retired a couple of years ago, aged 62 and 60, with a net worth of $3 million. Assuming they both worked for 40 years, they retired with more money than they ever earned working! And that is assuming the 70k combined income peak was a constant (which it surely was not) and that they paid no taxes on that 70k (which they surely did).”

A.T.: Since the average after-tax income over their lifetimes would have been a lot lower than $70,000 (salaries were a lot lower 40 years ago) – maybe just half $70,000 on average, after tax – Gilman notes that they retired with more than double their entire lifetime earnings.

Gilman Miller: “The problem,” he continues, “is that most people would see this and either assume it was untrue, or that they lived in miserly denial for 40 years, or that they lucked into buying Berkshire Hathaway back when you first wrote about it. In other words, that this is unattainable to most of us or simply not worth the sacrifice. It is attainable and it need not rule out having fun and even indulgences. Keep spreading the gospel and the rule of 72!”

A.T.: Put $4,000 a year into a Roth IRA and manage to compound it for 40 years at 12% and you will have $3 million. Of course, $3 million 40 years from now likely won’t buy what $3 million does today, which is why you will want to save and invest even more if you can (and to fully fund your 401(K), if one is available to you). But Gilman makes a good point.

That Rule of 72 he refers to, for those new to it, is simply that you can estimate how fast money will double by dividing its rate of growth into the number 72. Money growing at 4% takes 18 years to double, at 7% just a tad over 10 years, at 12%, 6 years. (“Why does this work? No one knows,” I once wrote. “It’s a rule.” Whereupon all the mathematicians descended on me like e-mail pigeons in a cyber version of Hitchcock’s The Birds.)



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