The Rule of 108: How Long Does It Take for Taxable Investments to Double?

You can use some simple formulas to calculate how much a given investment might grow over time, such as the Rule of 72. This rule can show you how long it will take for your money to double at a certain rate of return, but it also assumes the growth isn’t taxed.

What about estimating how long it will take for an investment to grow but when the growth is taxable? This is where simple calculations such as the Rule of 108 can come in handy. The Rule of 108 is similar to the Rule of 72 insofar as it lets you see how quickly your taxable investment might double in value. It also assumes a federal income tax rate of 32% that applies to the growth annually.

In this article, we will go more over the Rule of 108, how to use it to get an idea of how it long it would take for your taxable money to grow, some pros and cons, and how you can get the most out of it.

What Is the Rule of 108?

The Rule of 108 is used to estimate growth for money that will have the growth taxed as ordinary income each year. For example, a high-yield bank CD would be one asset whose interest earnings would be taxable as income.

Assuming a 32% federal income tax rate, the Rule of 108 can tell you how long it will take for your money to double at a certain rate of return. However, it’s not a 100% perfect equation because rates of return vary over time.

How Does the Rule of 108 Work?

In a nutshell, the Rule of 108 is a simple division equation. Take 108 as the dividend, divide it by your expected rate of return, and the answer is the estimated number of years it will take for your money to double in value.

So, say that you expect your money to grow at 5% per year and that money is in a bank CD. In that case, 108 / 5 = 21.6 years for your CD money to double in value.

How Do You Calculate the Rule of 108?

The Rule of 108 is easy to use. For example, say again that you have money in a bank CD, but this time the CD is earning 6% interest per year. Then you would divide 108 by 6 to get 18 years.

Of course, that is just an estimate, because not all investments post steady returns in most cases. Some investments may have a positive return one year and then a negative return in the following year. The sequence of returns will have a big impact on how many years it will actually take for your taxable money to double in value.

The Rule of 108 can be more effective in the case of bonds or CDs. Since they pay guaranteed steady rates of interest, it’s much easier to calculate how long it will take for your money to double in value with them. Just remember that if your bonds or CDs have call or put features, then those can affect your calculations. Your financial professional can explain what that means if your bond or CD product does have those features.

Another thing to keep in mind is interest rate risk. Should your bonds or CDs roll over during the wait time, this can also affect the equation because their interest rates may change in accordance with the current interest rate environment.

When Should You Use the Rule of 108?

The Rule of 108 can be a useful tool for those who are planning for retirement. It’s more helpful in particular for those near retirement and exploring interest-earning assets that have taxable growth. If you are in your 50s and want to retire in your 60s or 70s, the Rule of 108 can be useful for estimating how the taxable-growth parts of your portfolio might grow over time (especially if you will be drawing on them for income in later years).

You can also pair up the Rule of 108 with the Rule of 72, and the Rule of 72 be used for calculating growth on your tax-deferred investments. You might split your portfolio assets into tax-deferred asset and taxable asset groups, then use the Rule of 108 to calculate growth for your taxable investments and the Rule of 72 for growth calculations on your tax-deferred investments.

That can give you an idea of potential growth for your entire retirement picture. Your financial professional can also help you with further strategies in case that sequence of returns risk strikes or, just as importantly, options that turn those assets into reliable retirement income streams.

Incorporating the Rule of 108 in Retirement Planning

Just as is the case with anything, the Rule of 108 has its limits. If your retirement plan is heavily into stocks, then a major bear market could derail your lifestyle and financial goals. This rule should therefore only be used as a guide, not a guarantee.

In retirement, it’s important to preserve some of your assets from market loss risk and ensure you have enough money to last your entire retirement. One way to reduce downside risk is by having some money in a fixed index annuity, which guarantees your principal and also can let your money grow in value.

This unique vehicle offers tax-deferred growth and protection from market downturns. Fixed index annuities have also historically grown more in value than other types of guaranteed instruments such as CDs, Treasury securities, and plain-vanilla fixed annuities.

If guarantees are important to you, talk to your financial professional about how annuities can help you have more financial peace of mind. Apart from protection, these annuities and other annuity kinds can also pay guaranteed streams of income that you can’t outlive.

Pros and Cons of the Rule of 108

At this point, we have already covered some pros and cons of the Rule of 108. This rule assumes a perfect rate of reinvestment, which is impossible in the real world. Even investments that pay a guaranteed interest rate don’t reinvest their income with total efficiency.

This affects the Rule of 108’s mathematical formula, making it take longer than what the Rule of 108 says to actually double your money. It’s useful as a planning tool for retirement, but also make sure to include buffer time in your estimates.

For example, if the rule says that it will take 12 years to double your taxable money, it’s probably wise to plan on a 15-year span to reach that. That way, if a bear market hits right at 12 years, you may have some time to recover and arrive at your destination.

Again, the sequence of returns in your portfolio will also have an impact. If you are 50 years old and you calculate that your portfolio will double within the next 10 years, and then the markets drop by 40% that year, then it’s obviously going to take you longer.

Nevertheless, the Rule of 108 can still be a useful formula in order to get at least some idea of how long it will take for your money to grow. It has the same kinds of limits as the Rule of 72. However, there can be a wider margin for error with this rule because it deals with a longer time-frame.

The Bottom Line on the Rule of 108

In the end, the Rule of 108 is a simple formula that can help you plan for your retirement – or other financial goals, for that matter. It does have its limits, such as the sequence of returns risk and other factors as discussed.

Consult your financial advisor for more information on the Rule of 108 and how it can help you achieve your financial goals. Your financial professional can also help you think more about the threats to this rule’s effectiveness and obstacles to your financial goals in general. If you are looking for a financial professional that is experienced, independent of being beholden to any financial companies, and knowledgeable, many financial professionals are available here at SafeMoney.com.

You can get started with exploring your options by visiting our “Find a Financial Professional” section. There, you can connect with someone directly for an initial appointment to discuss your goals, concerns, and financial situation. Should you need a personal referral, call us at 877.476.9723.