As my colleagues and I offer guidance on the American Library Association’s (ALA) more than $60 million in investments, some of the questions that arise are the same ones you may consider when managing a personal retirement account:
- What investments should I choose (e.g., stocks, bonds, exchange-traded funds, mutual funds)?
- Which financial services company fits my needs (e.g., Charles Schwab, Fidelity, TIAA, Vanguard)?
- How much will I take out of my account each year as a distribution?
That last decision is significant, because it affects how long the money will last and continue to grow, and it’s the one I will discuss in this column.
Compounding and the Rule of 72
The Rule of 72 is a central principle for estimating how quickly an investment will grow. It says that compound interest will double an investment in 72 years divided by the interest rate (if you express it as an integer rather than a percentage).
To illustrate: Say you have $100 in a savings account that gets 4% interest. If you don’t put any more money in or take any out, you will have $104 at the end of the year. If you leave it alone and keep getting 4% interest, it will take 72 years divided by 4, or 18 years, for your original $100 to double to $200.
The Rule of 72 works for any interest rate, with the doubling time decreasing as the interest rate increases. So:
- A 5% interest rate doubles the principal investment in about 14 years;
- A 6% interest rate doubles in about 12 years;
- A 7% interest rate doubles in about 10 years;
- A 8% interest rate doubles in about 9 years.
The long-term average return for the US stock market is about 10%. A portfolio that mirrors the US stock market doubles, on average, about every 7 years.
ALA’s endowment portfolio includes both bonds and cash, making the investment results less volatile than the stock market. It also reduces average returns, although the return has been more than 8% annually since the portfolio’s inception on November 1, 1994.
Distributing funds from investments
Traditionally, each year ALA distributes 3%–5% of the average value of its investment portfolio over the previous five years (20 quarters). These distributions fund operations, scholarships, division-based initiatives, awards, and other needs. For the past several years, ALA’s distributions have been about 5%, and nearly $3.5 million in 2025.
Since the distributions are less than the portfolio’s average investment growth, the portfolio has grown by about 4% each year over the past 10 years. Our goal is to use the same kind of disciplined approach that an individual investor does in balancing long-term growth with the opportunity to fund critical services today.
