rule of 72“Be sure to put me down for my usual lecture on how to be a millionaire on a teacher’s salary.” Those startling words came from my major advisor in December 1981 at Ohio University where I was a full-time graduate student in my mid-40s working on my Ph. D degree.

He had given me his previous course outline and had asked me to come up with a new one that we would use to team teach a winter quarter 1982 course: Economics for Elementary Teachers. Surprised to say the least, I immediately asked him: “How is that possible?” (Beginning teachers starting salaries were about $15,000 then.) He responded: “You will find out when I give the lecture.”

The essence of his lecture two months later was incredibly simple. Save 10 percent of everything you make. In other words tithe to yourself. He said that money should be invested into ownership — either into the stock market or into real estate or both as he had done.

He explained the “rule of 72.” Divide the return on your investment into 72 to find out how long it will take to double. (From 1926 to 2014 large-cap U.S. stocks have averaged just over 10 percent — dividing into 72 means your money invested doubles about every 7 years.) He said that rule makes it possible for most teachers to become millionaires when they retire in their mid-60s, unless they are very unlucky.

If a beginning teacher in her early 20s follows that advice today and makes an average market return she will have doubled her original investment 6 times by the time she is in her mid-60s 42 years later (42 divided by 7). Doubling your original investment six times means it’s multiplied by 64 so $3,000 saved now in a Roth-IRA becomes $192,000 tax-free dollars in 2057. Saving $3,000 yearly — $250 a month — for 42 years, averaging a 10 percent return, totals a whopping $1.6 million. (Of course, given inflation that amount will be far less in 2057-dollar buying power.)

The problem is, of course, convincing young adults to save. I understand as didn’t make my first voluntary saving until contributing to an IRA in 1984 at age 48. However, I was so lucky that, as a state-employed college professor, 6 percent was taken out of my paycheck each month (I had no choice) and NC taxpayers matched it with another 6 percent. Beginning in 1972 that money could be invested into the stock market. When I took early retirement from WSSU to join Woodard & Co. in 1992 I had about $172,000 saved in my college retirement fund.

I have been leading mutual fund investment seminars at Forsyth County Libraries since 1986. Looking back nearly three decades, my number-one disappointment is my utter failure to reach younger adults, especially the under-40s. Even at our special seminars for beginners, “The ABCD’s of Investing in No-Load Mutual Funds,” typically more than 85 percent of the attendees are over 40.

Our recommendations never change! If your employer has a matching contribution for your pension plan at work, usually a 401(k), you must invest there first to get the entire match! One common match is 50 percent of the first 6 percent of your pay; therefore your employer is giving you 3 percent of your salary each year. The advantage of saving at work is that the money is taken out of your salary before you can spend it and you get the advantage of dollar-cost-averaging where you are automatically buying more shares with your monthly contributions when the market declines.

Twenty-five percent of employees nationwide do not participate or do not take full advantage of their employers’ offer of free money. Steve calls that “fiscal insanity!” If the Roth 401(k) is available we recommend that choice to lock in tax-free growth forever.

The second place to save is into a Roth-IRA. You must have earned income and some high-income taxpayers are not eligible. The maximum contribution both 2014 and this year for those under age 50 is $5,500 and it is $6,500 for age 50 and over. Save regularly and automatically — all mutual fund companies and discount brokers permit automatic drafts from your checking account. My favorite discount broker, Scottrade, will deduct as little as $100 quarterly ($400 a year) after you open a no-fee account for a minimum $500. (It has several good funds that can be purchased for $200 or less.)

Finally, if you can still save more, up your contributions at work. Maximum 401(k) contributions for this year are $18,000 for under-50 and $24,000 for 50 and over.

Starting to save as a young adult, accepting free money from your employer if available, and using Uncle Sam’s tax shelters as much as possible are the three keys to becoming a wealthy senior. The fourth one is simply investing your long-term savings into the stock market, the only place that averages double-digit returns.

Want to learn more about investing? Join Dr. Hungerford and Steve Hungerford at the upcoming seminars!



Originally posted: Winston-Salem Journal on Sunday, February 15, 2015 ::