We love to have rules of thumb to guide us. They are designed to give you a rough idea of what to aim for so you can get started on your goals. A rule can sometimes help make decisions easier. However, it likely will not give you an accurate answer for your own personal situation and, indeed, some rules of thumb have become outdated.

Here are five rules of thumb that could use an update:

Rules of Thumb

Save 10% of your gross income

The problem with this rule is there is no context. Are you saving this for retirement? Or, in addition to retirement savings?

Most current employees will no longer enjoy a defined benefit pension when they retire. In order to reach retirement goals a saving rate of 15% or even 20% may now be necessary. First take advantage of any company pension matching programs, then top up.

Savings for other goals – emergency fund, house down payment, child’s education, vacation – depend on the amount you will ultimately need and your time frame, so saving 10% of your salary may or may not allow you to reach your particular goal.

Your retirement income needs to be 70% of your employment income

In a report prepared last year for the C.D. Howe Institute, Malcolm Hamilton debunked the widely accepted maxim that people need 70% of their pre-retirement income to maintain their standard of living, saying it’s possible to live comfortably on less (50 – 60%).

This rule focuses on income – not expenses. It’s what you spend that matters.

First you need to identify which expenses will disappear when you are no longer working. Then, consider the lifestyle you want and what it will cost. Retirement could be on the costly side (extensive travel) or on the frugal side (staying home and watching TV).

Your needs in retirement should be based on spending, inflation, your health and life expectancy, not previous salary.

Home expenses should be no more than 32% of your gross income

This figure is the Gross Debt Service ratio (GDS) your bank will use to determine your maximum mortgage amount. It includes the mortgage payment, property taxes, heating (and 50% of condo fees). It does not include home insurance, other utilities or any maintenance costs. If the mortgage amount is based on two salaries, what happens if one of you stops working?

Contrary to this popular guideline, your total home ownership costs probably shouldn’t exceed 30% of your gross income, and some advisors would even reduce that to 26% or 28%.

Keep an emergency fund equal to 6 months’ income

Here again, the focus is on income instead of expenses. If you lose your job, for example, you should be able to cut any extracurricular expenses to the bone, (as well as any savings programs).

Three to six months’ worth of your necessary expenses would be a more accurate figure. Also, no credit card debt and having access to a line of credit would help in a short term emergency.

Subtract your age from 100 to determine your stock allocation

This rule worked better when bond yields were higher. Now, if you’re retired and you depend on this income, you may not be earning enough and may face a shortfall if investments underperform.

Related: Projecting investment returns and inflation

Advisors now think that may be too conservative and the number should be readjusted to 130 or 140. Consider your risk tolerance and such factors as lifestyle needs, probable life expectancy and whether or not you have a strong pension.

Final thoughts

It’s more accurate to devise your own rules of thumb based on your goals and needs.

They may be as simple as “I don’t pay more than $65 for a pair of jeans,” or as complex as your personal Investment Policy Statement.

You are not the same as everyone else – you shouldn’t be strictly following a general rule.

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15 Comments

  1. Keith on July 13, 2016 at 4:03 am

    I do not pay more than $10 for jeans at a thrift store !!

    • Denis on July 13, 2016 at 6:28 am

      I have seen some young people paying well over 100$ for jeans,

      • Sarah on July 13, 2016 at 6:57 am

        But have you seen their butt in those jeans – worth every penny!! 😉

        • Denis on July 13, 2016 at 7:44 am

          lol I’m too old to look 😉

          • fbgcai on July 13, 2016 at 1:17 pm

            then you must be dead! never too old to not look 🙂



  2. Denis D on July 13, 2016 at 6:26 am

    The 70% rule was initiated by American planners where health care is an issue. In Canada many can easily afford to retire on 50%. But we always based our calculations on expenses and it has worked.

    • Jim on July 13, 2016 at 10:08 am

      Agreed. The bigger numbers are usually put out their by those with a vested interest in getting people to save more.

  3. Joyce R. on July 13, 2016 at 7:42 am

    When I grocery shop, I price match almost everything at 1 store. I shop the sales & stock up on items that do not outdate.

  4. Pete on July 13, 2016 at 11:39 am

    Yes there’s a problem with the 70% of income rule, but there’s also a problem basing it on your current expenses as both are backward looking when you’re trying to plan for the future. In my experience when people retire they have a lot of free time and devise of many new ways to spend money, ie. grandchildren’s education, expensive once in a lifetime vacations, cars, RVs, houses, etc. Let alone those unknowable expenses. For younger people the 70% rule, in fact I would say 100% of their starter salaries, works because they have no idea what their retirement will look like and over saving at a younger age is a great problem to have. It’s more fun looking to spend money than it is looking to cut back. For those closer to retirement they really need to nail down what their retirement looks like so they can afford all the things that are meaningful to them and not just simple exist. As you said this is all very personal and everyone needs to figure out what works for them, but advisers like having a margin of error, because over saving is a great problem to have.

  5. Carrie on July 13, 2016 at 4:48 pm

    I also don’t like the 70% of income rule for retirement. We now live on about 50% of our take home pay. I can’t imagine we are going to need 70% of our income in retirement.

  6. Claire on July 13, 2016 at 7:05 pm

    I find most rules of thumb very frustrating because I do not own a home and likely never will. I live in a city where real estate is unaffordable, so any effort to buy a home would gut my retirement savings and make it impossible for me to retire. I think I actually have enough to retire on now – at least, my investment advisor says so, and my accountant concurs – but I can’t get a further reality check on this because all the articles and books on retirement assume everyone is a home owner.

    • May on July 14, 2016 at 1:19 am

      Yep. Everyone who will retire owns a house and can split their income with their spouse. ARGHH!!!! I have seen only one book out of thousands of personal finance/get ready for retirement books that addresses retirement for singles. And it was written by and for an American, so only marginally useful for we Canadians. MoneySense had an article that talked about retirement for singles a few years ago. But that was one out of thousands. I finally gave up and engaged the services of a money coach who is helping me get my ducks in a row.

    • Denis on July 14, 2016 at 8:50 am

      There are retirement ready articles with real people (I think they are real) in Financial post and Globe and Mail. Also I decided to retire based on a calculator on the CRA web site and some self reflection. Luckily for me, I retired just as the best bull market took off 5 years ago so I have much more than when I retired (and I don’t have a company pension plan as I took the lump sum LIRA – 1. I didn’t have enough years there and 2. I wanted to decide when I take, not based on my old company’s points calculation.

      If you can take retirement young(ish), take it. You never know how long you will have left. If you have both acct and financial advisor say you can, you should.

      I am also lucky to have bought and sold a few real estate properties (homes and cottage) and to live in a relatively cheap area (housing wise). I do feel for young people that will never buy homes or never finish paying mortgages. Even in Quebec/Eastern Ontario.

      Good luck with your decision

      ps. If you love your job, then maybe stay longer and get more secure. At end of my career, I saw this would not last and loaded up my RRSP and did as much OT as I was allowed.

  7. KC on July 15, 2016 at 8:35 am

    As a 30-year old something, it’s definitely hard for me to plan for retirement. However, the rule of thumb does give me some guidance as I can always adjust the plan accordingly later in life.

    For example, I don’t have a company pension plan and I never will so I have to save more. Second, I’m a very active person and love to do a lot of things (can be a good thing and sometimes a bad thing!) so I expect to spend about 70% of my income in the early years of retirement so I’m aiming for 70% for now but can easily adjust that later. I would rather be too conservative than to shortchange myself as I don’t expect OAS to be around when I retire. I have better hopes for the CPP though.

    As for 10% of income, I’ve always had the same issue of “is it for retirement or just overall savings”. So, I just took it at 10% of retirement and save another 5% for short-term savings. Now, I save 15% for retirement and 15% for short-time savings as my income grew.

    Good write-up but do keep in mind, it’s sometimes a good start in directing young people on how to save but do agree that 32% of gross income for housing is totally wrong. I did that in my early 20s on my low income and was struggling on a monthly basis. Totally not right for me. I moved out quickly to a cheaper place and based it on 32% of my NET income. Now, I had a more comfortable cushion and less stress.

  8. Mary on July 15, 2016 at 11:50 pm

    I’m not counting on CPP being there once I turn 65. Every time it’s our turn to have a govt benefit, that benefit is canned or we made too much! So we invested in the real estate market. Started young, bought small affordable properties far north of T.O.. Yes, even we couldn’t afford the city market 30 years ago. Mortgage rates were ~11%. Second mortgage just shy of 15%. Killer! So, we saw CPP as something that we weren’t going to bank on. We’ve banked on ourselves! We’re now retired! Freedom 48! P.S. Only buy what you need. Remember an everyday car is not an investment. Don’t try to keep up with the Jones’, ever! Be happy and appreciate what you do have! Never depend on others when it comes to retirement!

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