Understanding how to figure IRA growth is an essential part of smart investing. With so many investment opportunities available today, being able to determine exactly what needs to be saved into an IRA will provide a good budgeting overview that will make retirement a lot more comfortable. There are many free IRA calculators available online; however, IRA growth rates which use low interest rates can be calculated fairly easily with the "Rule of 72."
Determine the IRA account which needs to be analyzed or select an account being considered for investment.
Identify the interest rate currently being paid by the IRA. Many IRA plans may state that the annual rate of return is 8 percent. This is the number needed for the calculations. Contact the IRA provider if this number is not readily available or if the documentation is unclear.
Estimate the IRA growth rate by applying the "Rule of 72." This simple equation accurately estimates the amount of time it will take for an initial investment to double given a certain rate of return (annual interest rate). If the IRA has an initial investment of $10,000 and pays 8 percent interest, then simply divide 72 by the interest rate (8 percent), and the quotient (9) is the number of years it would take for the original investment to double. So 72 / 8 = 9, or it would take nine years for a $10,000 investment to become $20,000 at an 8 percent annual return.
Use a calculator to determine the compound interest formula if the resulting quotient does not seem correct. This formula is: Future Value (FV) = Present Value (PV) X (1 + Interest Rate (i)) to the power of the Number of installments (n). In the example, this is 20,000 = 10,000 x (1 + .08) ^9; this results in a balanced equation.
Use the "Rule of 72" to compare current IRAs and interest rates to determine whether or not the amount available upon retirement will be sufficient or if adjustments need to be made. This information can be estimated by taking the number of years left until retirement and dividing them by the quotient from the "Rule of 72." This gives the number of times the initial investment will double and therefore the final amount. In the example, if there are 54 years left until retirement, then the initial investment will double six times during that period. This person would have $640,000 at retirement from an initial investment of $10,000 at an 8 percent annual return.
The "Rule of 72" works well for lower rates of return. For higher percentages of return, the "Future Value" formula should be used. The method of calculating that formula is:
1) Simple annual interest: = Original Investment x (1 + (interest rate X number of years))
2) Annually compounded interest: = Original Investment x ((1 + interest rate) ^number of years).
- The "Rule of 72" works well for lower rates of return. For higher percentages of return, the "Future Value" formula should be used. The method of calculating that formula is:
- 1) Simple annual interest: = Original Investment x (1 + (interest rate X number of years))
- 2) Annually compounded interest: = Original Investment x ((1 + interest rate) ^number of years).
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