I’ve read a lot of personal finance books over the years. Most say some version of the same thing. Live below your means. Pay yourself first. Avoid debt like the plague. Invest your savings for the future. Rarely do I see a novel concept that gets me excited to share it far and wide. But that’s exactly what author Fred Vettese did with his latest book, The Rule of 30.
Mr. Vettese is a retirement expert, author of the best selling Retirement Income For Life, and a former chief actuary of Morneau Shepell. His retirement planning books are must-reads for Canadians in or approaching retirement.
The Rule of 30 is aimed at a different generation of Canadians: those aged 30 to 45. The book follows a Wealthy Barber-esque fable of a young 30-something couple (Brett and Megan) and their neighbour Jim, who happens to be a retired actuary. Similar to The Wealthy Barber tale, Brett and Megan have a series of weekend discussions with Jim to figure out how to save for retirement.
What exactly is this magical rule of 30?
Easy: Save an amount equal to 30% of gross income, minus the amount you are paying towards a mortgage or rent, minus extraordinary short-term expenses like daycare costs.
The rule aims to strike a better balance between competing financial priorities. It also makes it easier to decide how much to set aside each year, and is more realistic and achievable than saving a flat percentage of pay, especially during the expensive childcare years.
This is all about consumption smoothing – not depriving oneself of a standard of living during the years of juggling competing financial goals. It backloads the high savings rate to later years when childcare expenses are long gone and the mortgage or rent payments make up a much smaller percentage of your gross income.
I love it! This brilliant yet simple rule is exactly what young Canadians need who are financially tapped out and feeling like they’re falling behind. They can’t do it all, so why strive to save 10-15% of your income for retirement while you live paycheque to paycheque?
Mr. Vettese says to follow the rule of 30 until you’re within 10 years of retirement. At that point, take stock of your retirement-readiness and adjust your savings percentage accordingly.
For the record, most people still cling to the arbitrary 10% savings rule.
What percentage of pre-tax income should young parents (early 30s) save for retirement?
— Boomer and Echo (@BoomerandEcho) September 30, 2021
What I like about the rule of 30 is that it acknowledges the fact that life is hard for young families. Saving too much at an early age can have negative consequences for your enjoyment of life. The rule of 30 gives young savers a break, but offers clear guidelines about how much to save when short-term extraordinary expenses ease up and income increases.
Again, the rule of 30 involves saving 30% a year for retirement, minus mortgage payments or rent, and minus extraordinary short-term, necessary expenses like daycare.
It’s essentially a way to save until age 55, at which point a more precise calculation can be made for your required savings rate with help from a retirement calculator (or a fee-only financial planner).
Let’s see the rule of 30 in action.
Fake clients of mine named Ronnie and Lisa have a combined gross income of $166,666. The rule of 30 says they should save $50,000 (30%), less mortgage payments and childcare costs.
Their mortgage costs $2,300 per month, or $27,600 per year. They also have daycare expenses of $1,200 per month, or $14,400 per year.
This leaves Ronnie and Lisa with $8,000 per year to save for retirement. Astute readers will note that is just 4.8% of their gross income.
But the childcare costs won’t last forever. In five years those costs will be reduced to zero. At that time, with 2% annual salary increases, Ronnie and Lisa now earn a combined $184,000 per year. The rule of 30 says they should save $55,200 (30%), less mortgage payments and other extraordinary costs.
Their mortgage costs are still $2,300 per month, or $27,600 per year. They don’t have any other extraordinary costs.
This leaves Ronnie and Lisa with $27,600 per year to save for retirement. That’s now 15% of their gross income. Fantastic!
Ronnie and Lisa follow this path, increasing their savings rate as their income rises until eventually their mortgage is fully paid off. Let’s say they’re now earning a combined $225,000 gross income. The rule of 30 says they should save a whopping $67,500 for retirement (30%). And they can do this because their mortgage is paid off.
The beauty of the rule of 30 is all along the way Ronnie and Lisa can maintain a fairly smooth spending rate. There’s no period in which they are suffering financially. They give themselves a break on saving for retirement during their expensive childcare years, when the mortgage also makes up a larger percentage of their gross income and take-home pay. Then they ramp up their savings as their income increases and extraordinary costs disappear.
Dangers of The Rule of 30
Mr. Vettese acknowledges the dangers of this variable approach to saving for retirement. What else can be classified as an extraordinary short-term expense? A car loan? A home renovation loan? The author says there will always be expenses that fall into a grey area, and whether to include them as an offset to retirement savings is entirely up to you. But there’s no incentive for you to ‘game’ the system since you’re only cheating yourself at the end of the day.
Another danger is the risk of job loss or health issues that prevent you from earning income in your later years. If you’ve backloaded savings too much then there’s a good chance you won’t be prepared for retirement.
Mr. Vettese suggests paying off your mortgage five years before retirement (staying within the rule of 30, that would mean increasing the mortgage payments and reducing your savings rate). He also suggests discounting your projected income in your final working years by about 30% to hedge against one spouse losing their job.
Other Retirement Savings Enhancements
Besides saving 30% of gross pay, minus mortgage or rent, minus extraordinary short-term expenses, Mr. Vettese offers plenty of other insights in The Rule of 30.
He suggests investing in stocks and bonds instead of real estate. While buying condos or other real estate properties and renting them out has been a popular alternative to investing, Mr. Vettese says that as long as you have contribution room in an RRSP or TFSA, the use of tax-assisted investment vehicles is a better bet.
He also says to use a target-date-fund approach to set your asset mix, rather than using a static 60/40 balanced portfolio throughout your entire investing lifetime. That means starting with a high equity weighting (up to 100%) in your portfolio when you’re young, and then gradually increasing the bond weighting to an “ultimate-mix” of 50/50 just before retirement. Mr. Vettese says this approach has been more effective than a 60/40 asset mix over 30-year periods.
How Much To Save For Retirement?
I laughed when I read the opening chapter about how much you should save. Mr. Vettese was scouring books and the internet to find a source promoting a specific savings rate. None could be found. Then he wrote this:
My last find was an online article by Global News, which reported that “you may have heard you should be saving 10-15 percent of your pre-tax income”. This was tantalizing, since I wasn’t sure I had heard that, though it did sound vaguely familiar. Alas, this little nugget turned out to be little more than hearsay. The article didn’t cite the source of this 10-15 percent range or attempt to confirm that it is indeed correct. It smacked of urban legend.
The reason I laughed is because this article sounded familiar to me and indeed I was interviewed for it by Global’s Erica Alini. Hey, I made it into the book – sort of!
Mr. Vettese attempts to offer an answer to the question of how much to save for retirement with the rule of 30. He acknowledges that in reality, no one percentage can be certain to carry most savers across the finish line safely without causing undue hardship along the way.
He says if he absolutely had to provide a one-size-fits-all flat percentage of pay, he would make it 12% with the caveat that you might have to change that percentage as you get closer to retirement. Expressed differently, he would suggest saving 5% of income in your 30s, 15% in your 40s, and 25% in your 50s. This alternative represents a rough approximation of the rule of 30 (and lines up neatly with my Ronnie and Lisa example above).
Time For a Giveaway!
The Rule of 30 is a brand new book (released today!) by retirement expert and former chief actuary Fred Vettese. It offers an absolutely brilliant solution to the burning question of how much to save for retirement throughout your working years.
In addition to the rule of 30 and other retirement savings insights, Mr. Vettese shares his insightful wisdom about why the future will be different with a look at inflation, wage increases, interest rates, expected returns for bonds, and the wildly unpredictable stock market.
In short, this is book is an absolute game-changer for young Canadians and offers a fresh perspective on saving and investing for retirement. If young Canadians read only one book about personal finance, make sure it’s The Rule of 30.
I was fortunate enough to receive an early edition of The Rule of 30, plus an extra copy to giveaway to a lucky reader. You can enter to win that copy by leaving a comment below sharing your current savings rate (if you’re in the accumulating years) or past savings rate (if you’re already retired). Or, feel free to leave any comment in general about the rule of 30.
This contest will be open until Friday October 22nd at 8 p.m. EST. I’ll announce the winner in the next edition of Weekend Reading.
CIBC’s Deputy Chief Economist Benjamin Tal raised eyebrows this week when he said that one in five first-time home buyers is getting help from their parents with a gift, on average, of $150,000. Not only are more first-time buyers getting financial aid from the bank of mom and dad (up from 15.5% in 2015) but the dollar amount has more than doubled (up from $71,000 in 2015).
While the main story here is about rising home prices and growing inequality, I wanted to address the topic of generational wealth transfer. According to a J.D. Power study, as much as $700-billion in financial assets is set to be transferred to the next generation in Canada by 2026.
Like it or not, many retirees have more than enough assets to live their desired lifestyle and leave a significant estate to their beneficiaries. Why not incorporate some planned monetary gifts to your children or to a favourite charity during your lifetime?
Assume you live a long and healthy life to age 95 or so. That’s not as far-fetched as it sounds. FP Canada’s assumption guidelines suggest a 65-year-old male today has a 50% chance of living to age 89 and a 25% chance of living to age 94. A 65-year-old female has a 50% chance of living to 94 and a 25% chance of living to 96.
Now assume you have more than enough assets to meet your spending needs for 30 years, plus you plan to remain in your home.
Would you prefer to leave a large inheritance to your children at age 95, or give them smaller and potentially more meaningful amounts at key milestones such as buying a first home, starting a business, paying for post-secondary or an advanced degree, or filling up the grandkids’ RESPs?
When I discuss the idea of giving with a warm hand with my clients there’s often resistance because of a fear of spoiling their kids. They often see financial struggles as a rite of passage, as if living with four roommates in a rundown two-bedroom apartment while you work part-time to pay your way through school is the way to build strong character.
But you can give your young adult children a financial leg up without turning them into spoiled and entitled brats.
It’s about acknowledging that your kids are coming of age in a different world where affordable housing and education, defined benefit pensions, and company benefits have all but disappeared. We’re living in a gig economy with temporary contracts, no benefits, and housing and education costs that are spiralling out of control.
Your 20s and 30s are filled with so many competing financial priorities. Why not, if you have the means to do so, help your kids through this period so they can get started on the right foot?
This doesn’t mean they’re financially tethered to you. You’re not paying their cell phone bill and making car payments when they’ve left the nest. But smart and strategic monetary gifts at appropriate life milestones can help your kids through what’s becoming an increasingly difficult financial environment.
Of course, everyone needs to put on their own oxygen mask first before assisting others. Make sure your own retirement needs are met before making large financial commitments to your kids. That means not dipping into your HELOC or heaven-forbid your own retirement savings to give your kids a down payment gift.
I’d love to hear your thoughts on giving with a warm hand versus leaving a large estate behind. Let me know in the comments.
This Week’s Recap:
Author Mike Drak finished his excellent three part series on retirement lifestyle design by taking us from thought to action.
I’ll be making my MoneySense debut shortly with an article on growth investing. I’ll share that along with a fairly regular MoneySense column exploring other investing topics.
Promo of the Week:
The American Express Cobalt Card has long been considered the top overall rewards credit card in Canada. Cardholders get 5x points on groceries, dining, and food delivery, plus 2x points on travel, transit, and gas.
The best part of the Cobalt card, in my opinion, is the flexible points redemption. You can use your points to pay for almost any purchase you make with your card, or transfer your points to other programs like Aeroplan, Avios, and Marriott Bonvoy.
Sign up for the Cobalt card today and you’ll earn 2,500 bonus points for every month in which you spend $500 (up to 30,000 points in the first year), plus a Welcome Bonus of 20,000 Membership Rewards points when you spend $3,000 on your card in the first three months.
Can you buy bitcoin with a credit card? Our friends at Credit Card Genius look at the pros, cons, and pitfalls to avoid.
CBC Marketplace caught two real estate agents on hidden camera breaking the law and steering buyers away from low-commission homes.
A good rebuttal to the bogus Royal Lepage “study” that showed how buying a home is actually cheaper than renting. It’s not even close:
“People are stretched thin both by the actual monthly outlay for ownership versus renting of similar dwellings, plus the gargantuan size of down payments required to even get to the position of having a large mortgage.”
You might be able to hedge your rising heating bill before this winter by locking into a fixed rate for your household energy needs. I did this thanks to a nudge from U of C economics professor Blake Shaffer:
I can’t say this enough, but if you’re in Alberta and still on a floating rate for power and gas, you should *really* switch to fixed.
Can do so with most current providers or easily switch providers online in a few minutes.
Check out your options here: https://t.co/lfyTzCV4uY
— Blake Shaffer 📊 (@bcshaffer) October 5, 2021
Here’s Nick Maggiulli from Of Dollars and Data on why it’s never too late to change.
Millionaire Teacher Andrew Hallam answers five common questions people ask him about investing.
Frugal Trader from Million Dollar Journey gives some excellent advice on how to become a millionaire.
Finally, here’s former Vanguard CEO Jack Brennan offers three tried-and-true wealth building tips in this Acorns interview.
Enjoy the rest of your weekend, everyone!
When you retire you want to be intentional with your time and focus on doing the things that will give you purpose and meaning, what makes you truly happy.
In this final article, I’m going to bring everything together by telling you one of my favourite retirement lifestyle design stories.
The first step in the design process is to figure out what gives you a sense of purpose. That we discussed in the previous article. The next step is to build a lifestyle around that using the nine retirement principles outlined in “Retirement Heaven or Hell” as the foundation.
Your weekly schedule
We start by creating a weekly schedule for ourselves, which helps to create structure and routine in our lives, something we often lose when we retire.
By establishing a weekly schedule you make sure that you are making time for the things that are most important to you and the things you need to do in the short-term to hit your long-term goals.
Instead of drifting like most retirees, by using a schedule you will know exactly what you are doing, why you are doing it, and when. You don’t need to schedule every minute of the day. You just need to make sure you don’t miss doing anything important.
Make sure you schedule the things that make you happy
We learned from the famous “Nun” study that happy nuns live longer than unhappy nuns and the same principle applies to retirees.
Make sure you schedule in the things that make you happy, the things that put you in a state of flow, the things that make you come alive and really light you up.
Make time for practicing your art (whatever that means to you) as well as for exercise activities, volunteer work, going on new adventures, learning how to dance, learning a new language for that trip you have planned, and working if that will be a source of purpose for you.
And above all else, make sure to schedule some time each and every day for doing something you love with people you love.
Schedule your priorities first
Make sure you schedule your priorities first. These are your non-negotiables, the important things that you need to get done no matter what; your workouts, eldercare, taking care of the grandchildren, work and so on.
Once you’ve made time for them, then you can schedule in your other less important tasks, like cutting the lawn or getting a haircut.
Less is more
A common mistake for many retirement “newbies” is being in a hurry to accomplish everything on their bucket list and trying to do too much in a short space of time. This will only end up making you frustrated and driving you a little crazy, like it did to me.
Our goal in retirement is to reduce stress, not create more of it. So, start slow, find your own comfortable pace, and avoid over-scheduling yourself by packing too much into a week. I know some of you are in a hurry to make things better, but Rome wasn’t built in a day and neither will be your retirement.
Don’t let your work or whatever form of purpose you have identified suffocate your other interests. You need to set boundaries so you can make time for other things that are important to you, and to make sure you stick to those priorities as well. If you allow your purpose consume most of your day, you will fall behind on your other key goals and may be forced to delay them or possibly give up on them entirely. I personally know this well because this is where I got into trouble.
I needed to finish my first book in order to get my new public speaking and coaching business going. I would get heavy into the writing, and before I knew it, it had consumed most of my day, resulting in me missing out on my workouts and other things as well. Ignoring my other key goals just to get the book done frustrated me and stressed me out.
To create your own version of retirement heaven, you need to find balance and the right mix of work, leisure, health and relationships. Working too much, or focusing on just one thing, throws everything else out of kilter. And it can come back and bite you in the butt hard.
Below is copy of my own schedule. I write most mornings of the week (my purpose) and also make time for my workouts so I can stay healthy. I walk most days with my wife which gives us an opportunity to talk about things, and I make sure I make time to hang out with my friends and family. Also one day a week is devoted for my love of fishing.
Occasionally I will schedule in a special adventure like traveling to Italy or spending a week up at the George River fly fishing.
|12:00pm||Lunch with Friend||Bike|
An example: Jack’s story
In this story about Jack you will learn how he used Ikigai to find new purpose and the built a wonderful lifestyle around that.
I enjoy telling this story because Jack’s story is similar to mine. He was packaged off from his 36-year corporate job and was suffering from a bad case of retirement shock. His wife asked me to talk to him to see if I could help get him out of retirement hell and back on track.
After the usual retelling of bank stories and the accompanying laughter (this is what ex-bankers do), it came out in conversation that Jack after a bad day at the bank would decompress after dinner by going down to the basement and working on renovating it. I guess hitting things with a hammer made him feel better, and it was far better than sitting down on the couch having a few beers and watching TV, like I did.
I asked him to show me his basement and it was just beautiful. It was quite obvious that Jack was good with his hands and knew what he was doing. After talking further, I learned that he had even built his cottage with his father. They built the whole thing by themselves, doing all the plumbing, electrical and woodwork, even the pouring of cement for the foundation.
Upon hearing this, I pulled out the laminated Ikigai diagram I always carry with me and we got to work. It was easy to figure out a good possibility for him: doing cottage renovations.
At first, Jack pushed back because of his fear of starting his own business, which I found interesting as he helped a lot of clients while in the bank run theirs. But Jack had never run his own business before and he didn’t know how he would be able to get customers.
Being a cottage owner myself, I told him that finding customers would be easy. Getting good tradespeople who show up when they are supposed to and do quality work on budget is as rare as winning the lottery. Cottagers talk, and I told him that if he did one job that was good, the word would spread and he would be up to his ears in work in no time.
Jack pondered things over for a while and eventually took the plunge, and before long, people were lining up to have him repair things for him.
This led to another problem though, as Jack’s wife got a little mad over him working so much. The three of us had another meeting where a compromise was struck: Jack would only work weekdays from nine to four and never on the weekends which were reserved for family who visited the cottage regularly during the summer. There was no working in the winter, and instead Jack and his wife would winter in Costa Rica and have the kids come down and visit during the holidays.
It was a win-win for everyone, but Jack and his wife decided to take it one step further. They sold their home in Toronto and used part of the proceeds to help their daughter buy a bigger house in a better area with a downstairs walkout. Jack fixed up the basement, and that is where they hang their hat when they are in town. When they are not there, their grandkids use the basement as a play area.
This arrangement also worked well during Covid. Jack’s wife spent a lot of time at their daughter’s house, watching over the grandkids and homeschooling them while the parents went to work. It was nice to know that the kids were being taken care of and there is nothing better than returning home to a home cooked meal at the end of a stressful day.
One last thing, Jack used the money left over from the sale of their house to boost their retirement savings and help save for the grandkids’ education. Jack is now living the life of Riley all because of a simple Ikigai diagram. Now that is what I call a smiling Jack!
This is just one example of the many success stories I hear from people about how they were able to design a retirement lifestyle that works for them and if they could do it, there is no reason why you can’t too.
I hope you enjoyed this series and that it gave you some new ideas on how to plan for your own retirement lifestyle.
Mike Drak is an author, public speaker and recognized authority on the non-financial aspects of retirement. After having spent 38-years in the financial services industry, Mike retired and personally faced what he called “retirement shock”. During this time, Mike found himself on a journey of self discovery and authored two best selling books on retirement; Victory Lap Retirement and Retirement Heaven or Hell: Which Will You Choose?. Mike is a Senior Contributor at Booming Encore and dedicates his time to helping other retirees design a fulfilling, meaningful retirement lifestyle for themselves.