Agree or Disagree – Testing 15 Financial Rules

Recently, this article on BrighterLife.ca caught my attention – 15 common financial rules of thumb.   Author of this article Dave Dineen offered his take on these rules, and today’s post will offer mine.

Your retirement income needs to be 70% of your working income.

Largely agree, this is one of the more reasonable financial rules of thumb.   While some big, current expenses are expected to disappear in retirement (mortgage, RRSP contributions), new ones may appear (rising healthcare costs, travel).  Our goal is to save for about 50% of our working income, excluding any contributions to workplace pensions, excluding any projected assistance from any government programs.

Keep an emergency fund equal to six months’ income.

Somewhat agree.  A six-month fund would be very handy in a job loss situation but it’s very difficult to rationalize this sum of money and the opportunity costs associated with this; getting this amount of money working for you.  That said, we have a few thousand saved up in our emergency fund now, we hope to have this amount eventually, at some point.

Don’t pay more than 3.5 times your gross annual income for your house.

100% agree.   When it comes to mortgage debt, I can’t imagine having more than what we have on the books now.  Our mortgage debt remains over this amount and I want it dead.  I can’t imagine what some 30- and 40-somethings are willing to pay for some mortgages in Toronto, Calgary and Vancouver now.

Don’t invest more than 5% of your savings in any one stock or bond.

Largely agree.   Investors need to diversify and I need to do more of this myself, using low-cost broad-market indexed Exchange Traded Funds (ETFs).  I think I have a few stocks in my portfolio that are approaching 5%, but not very many.

Accumulate 20 times your gross annual income, then retire.

20 times?  100% agree.  Realistic for 99.9% of Canadians?  No way.   If I can save 10 times (my annual gross income) I will be very happy.

Never touch your retirement savings, except for retirement.

I hope you know my answer if you’re visiting my blog but if not, 100% agree.

In retirement, you can sustainably live off of 4% of your next egg.

Largely agree.  I’m hopeful our retirement portfolio will yield about 4% every year, on average, and we will not need to touch our capital until old age.  I figure we might need our capital for any significant, unexpected healthcare costs.  Hopefully not.

If your employer matches your contributions to a workplace savings plan, go for it.

100% agree next financial rule please.

The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.

100% disagree.   This advice is out-of-date and furthermore does nothing to reconcile with an investors’ objectives.  I used to think this was a good rule of thumb but I’ve changed my tune considerably.   I can’t see how some 50- and 60-year-olds would welcome this advice in today’s bond market.

Total home ownership costs shouldn’t exceed 30% of your gross income.

100% agree.  Owning a home is expensive and paying too much to own one doesn’t make any financial sense to me.  There is more to life than home- moanership.  I struggle with how the banks calculate their consumer debt-service ratios for lending purposes.

Your total debt servicing costs shouldn’t exceed 40% of your income.

100% agree.  Debt can be a wealth-killer and limit your cash flow options. See above.

Don’t plan to retire with debt.

100% agree.  Debt sucks.  See above.

You need to have x times your annual income in life insurance.

100% disagree about “x” insurance.  I write about life insurance often on my site, I’m learning more about insurance every year because of it but I think lots of life insurance only makes sense when you have lots of, or many liabilities in your life from which your catastrophic loss would hurt your family financially.  Everyone’s needs are different, which is a good thing, and life insurance professionals are there for that.  If you can afford to self-insure great but I suspect that would be for the minority of working Canadians.  You own what you need.

What do you think about these 15 financial rules?  What do you think about my answers?

Tweet about this on TwitterShare on FacebookShare on Google+Share on LinkedInEmail this to someone

42 Responses to "Agree or Disagree – Testing 15 Financial Rules"

  1. Great article, Mark. I didn’t read Dave’s yet, but would like to offer some of my comments on ones I may (slightly) view differently:

    Your retirement income needs to be 70% of your working income. – I’m more on the 50% end, at least I hope we can be, but certainly no more than 60%. It depends on your income really.

    Keep an emergency fund equal to six months’ income. – depends on how you gain your employment income. If you are self employed, even 6 months could be considered too low. Plus, you’re not really tying up the money if you have it invested in TFSA funds (not just 1-2% interest bearing TFSA cash accounts). That’s how we keep our 6+ months of emergency.

    Reply
    1. I think 70% is a bit high, more than safe, but probably a good rule of thumb.

      That’s a good point on the emergency fund. I would think those that are self-employed probably need to be more conservative and have a higher fund. We keep our emergency fund very liquid. If it’s truly an emergency you need the cash fast.

      Thanks for the comments!

      Reply
  2. – Your retirement income needs to be 70% of your working income.
    mine will be between 91 and 95%, it’s because I plan to continue to make contributions since I will retire well before 67, even before 60. I think it’s better to make an expense plan with about 30% of additional room than to use a fixed rule.
    – Keep an emergency fund equal to six months’ income.
    My LoC is my emergency fund. And I’m agree with you, to put thousands of $ in that is a waste IMHO
    – Don’t pay more than 3.5 times your gross annual income for your house.
    I don’t have a house so I can’t speak for this one.
    – Don’t invest more than 5% of your savings in any one stock or bond
    For me it depends on the valuation of the stock (don’t say “HIM AGAIN and his value investing way…” 😀 ) according to certain score it can be 5/10 or 15% at max (that doesn’t mean that a stock reach that)
    – Accumulate 20 times your gross annual income, then retire.
    See the first rule’s comment
    – Never touch your retirement savings, except for retirement.
    A golden rule, especially when you see banks and other “managers” that push people to use their savings and RRSP for mortgage and over sh*t…
    – In retirement, you can sustainably live off of 4% of your next egg.
    Well, it will depends on the “official” inflation by these times
    – If your employer matches your contributions to a workplace savings plan, go for it.
    Easy peasy 🙂 Excepted if you plan to retire before 67 but anyway…
    – The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.
    Silly nonsense rule that doesn’t take into account any global markets data, so I disagree too.
    – Total home ownership costs shouldn’t exceed 30% of your gross income.
    Especially if it’s your bank that have its mortgage claws on it…
    – Your total debt servicing costs shouldn’t exceed 40% of your income.
    Even lesser is good. A company with 50% or more of debt / capital isn’t good so it’s the same for us
    – Don’t plan to retire with debt.
    can’t be more agree
    – You need to have x times your annual income in life insurance.
    disagree, no need, just another hassle

    Reply
  3. Your retirement income needs to be 70% of your working income.

    Don’t agree. Maybe you need more, maybe you need less. You need to establish what you require to leave well, then add 15% for contingency. This is your retirement requirement for year 1. You need to take into account that inflation will double this requirement in 25 years so like you will not decrease your need, you need to plan it! Ideally your retirement income should 1.4x your year 1 retirement requirement. Unfortunately, not related to your working income.

    Keep an emergency fund equal to six months’ income.

    Somewhat agree. I was lucky enough that my wife had a safe guarantee job so we never have to keep six month of income on the side.

    Don’t pay more than 3.5 times your gross annual income for your house.

    100% agree but will write it differently: never get a mortgage more than 3 time your annual income

    Don’t invest more than 5% of your savings in any one stock or bond.

    Largely agree. I got one stock around 7% (Royal Bank) mainly because it is a major composing of the Epargne Placement Quebec IQ30

    Accumulate 20 times your gross annual income, then retire.

    20 times? 100% agree. I will retire with less than 10x and will not run out of money.

    Never touch your retirement savings, except for retirement.

    100% agree. However, Pay debt before putting money for retirement

    In retirement, you can sustainably live off of 4% of your next egg.

    Largely agree. In fact it is actually based on a 3.25%, mainly in dividend. Only company with solid history of dividend growth.

    If your employer matches your contributions to a workplace savings plan, go for it.

    100% agree

    The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.

    100% disagree.

    Total home ownership costs shouldn’t exceed 30% of your gross income.

    100% agree.

    Your total debt servicing costs shouldn’t exceed 40% of your income.

    100% agree.

    Don’t plan to retire with debt.

    100% agree.

    You need to have x times your annual income in life insurance.

    100% disagree. I had 3x my annual income when I was 30 with two young kids and a mortgage. Today I got 1x because it is included in my employer package.

    Reply
  4. You’ve completely ignored an investment strategy with your focus on equities to the exclusion of bonds – rebalancing.

    Neither long timeframes nor a defined benefit pension plan help when it comes time to rebalance after a market crash. For that, you need money in bonds to be able to stock up on equities.

    Reply
    1. Possibly Glenn. I’m of the opinion that bonds prevent you from doing something stupid with your portfolio. They act as insulation to avoid selling equities when equities crash for prolonged periods. Thus, you can rebalance if and when you hold bonds – since bond prices tend to go up when equities fall.

      I think if investors are comfortable with more risk, investors can simply add new cash flows to diversify their equity holdings over time. Historically, as you well know, cash returns < bonds and bonds < equities. A defined pension in retirement to me is like a big bond, it is fixed income. I see little merit in holding bonds at today's dirt-low interest rates whereby rates have really only one direction to climb. This is just my approach, others will differ for sure. Thanks for the comment Glenn, I appreciate the different perspective.

      Reply
  5. oops! i agree with most of these “guidelines” “targets” but most will never be able to attain them due to individual situations. i say “oops” because we have been retired for 8 years and it is too late to worry about them. i wish everyone good luck — it is good to have goals but too much stress is not good so just do your best.

    Reply
    1. Great point Gary…everyone is different and I wouldn’t say these rules apply to everyone universally, precisely the agenda behind the post.

      Save, invest, follow some trusted guidelines and hope for the best. Nobody can predict the future, you can just prepare for it and change your plan accordingly as best you can 🙂

      Reply
  6. Mark,

    You can’t also imagine what people pay for house in Fort Mcmurray pays. 1400 sq ft Duplex cost over $600,000 and the rent for 2 Bedroom condo is $2500. Companies give good retention plans to make people stay in the city.

    Inderpreet

    Reply
    1. Those are crazy prices Inderpreet…I cannot fathom having a $500k or $600k mortgage anywhere. What if any of those people lost their job(s)? What if a major economic crash happened? Who would they sell their home(s) to?

      Thanks for the comment.

      Reply
      1. Mark,

        My wife’s employer home program gave us courage to buy the house, the company will cover our losses if we sell for less. The rental is so expensive that most people end up buying house as their employer has good housing assistance program. Some of my friends are brave enough to buy 2 or 3 house in the city. The good rent money don’t let them think about its short term disadvantages in case of economic failure and want to make as much as they can .I thought of buying rental house in Edmonton but cancelled my decision because I wanted to diversify my investment into other things rather than buying property. I may be getting less return now but it’s good enough for our long term goals

        Inderpreet

        Reply
        1. That seems like a good deal: employer home program gave us courage to buy the house, the company will cover our losses if we sell for less.

          Your friends own 2 or 3 houses? I don’t know if I could do that – too many eggs in one type of investment, real estate. I prefer to diversify, sounds like you do as well. I think that’s a smart call but I’m biased because I don’t own rentals anymore, although we used to own one but got out of that:
          http://www.myownadvisor.ca/looking-income-dont-want-landlord-try-reits-101/

          Thanks for the comment!

          Reply
  7. Fascinating! When I wrote my original article about my take on 15 financial rules of thumb — http://brighterlife.ca/2014/07/31/how-reliable-are-these-financial-rules-of-thumb/ — I didn’t suppose others would jump in with their own complete lists.
    That’s kinda cool!
    It’s a good sign that folks aren’t just accepting these rules without thinking about what they’re doing (or unnecessarily worrying about what they’re not doing).
    Cheers!

    Reply
    1. Great to hear from you Dave. Yes, I was surprised some folks did the Q&A thing on my site as well but it’s was fun to read those comments.

      Everyone’s needs are different, and the rules are good guidelines but it was great to see folks not just blindly taking these things as gospel. Keep up the good work on BrighterLife Dave, I enjoy the posts!

      Mark

      Reply
  8. Great article, I never understand the idea that percentage of bond/fixed income should be equal to your age. In today low interest rates environment that statement makes very little sense.

    Reply
    1. I used to think the bond-matches-your-age formula was a decent one, until I reasoned that my pension plan at work is really a big-bond. In this low-interest rate environment, I doubt it makes sense for most investors anymore let alone what pensions they have or do not have.

      Thanks for the comment.

      Reply
    1. Absolutely Brian! I’ve heard of some people dipping into their RRSPs for travel and fun. Either they don’t what can hurt them or they have TONS of cash to burn!

      Reply
  9. Seventy percent of pre retirement living expenses is a better way of describing the need.

    We are anything but frugal since retirement and are tracking spending at only 60 percent of pre retirement. There are a lot of coffees and meals out in our current expenditures that could be sacrificed without too much impact (except on my waistline).

    That magical how much do I need is very hard to define. So much depends on what you want to do, so much depends on what you have been earning in the past.

    Reply
    1. You’re probably right Richard, I think if most Canadians can save 50% of their pre-retirement living expenses, they are doing very well.

      My hope is my wife and I can save 40-50% excluding our pensions. That’s an aggressive target I know but we’ll see.

      The fact you are tracking your spending is key, you’ll know what your burn rate is, I wonder if others are as diligent as you? I think I know the answer 🙂

      Reply
      1. If people don’t track spending, I could see them having serious problems when planning retirement – or anything really.

        We kept a spreadsheet of expenses for at least three years before committing to the great vacation. It took the hard cold numbers for me to realize how much a few double doubles and lunch at work every day was costing

        Keeping track was not hard, there are several decent spreadsheets out there that can categorise spending for you.

        Reply
  10. Your retirement income needs to be 70% of your working income.
    **Mostly agree. Good target for most people but “need`s to be“ might be a bit strong.
    Keep an emergency fund equal to six months’ income.
    **There are other options such as PLOC but some reserve easy to get at cash is a good idea.
    Don’t pay more than 3.5 times your gross annual income for your house.
    **Not qualified to have an opinion on this one. I hate debt and would rather live in a smaller house myself.
    Don’t invest more than 5% of your savings in any one stock or bond.
    **Some conglomerate style stocks are fairly diversified (BAM) so some flexibility on this rule. Having a large percentage in similar stocks (banks) might also be a concern.
    Accumulate 20 times your gross annual income, then retire.
    **Great goal, tough to achieve for average folks.
    Never touch your retirement savings, except for retirement.
    **No brainer IMO.
    In retirement, you can sustainably live off of 4% of your nest egg.
    **Kinda depends on the size of the nest egg.
    If your employer matches your contributions to a workplace savings plan, go for it.
    **Again, no brainer unless the investment vehicle is very poor.
    The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.
    **At one time this might have been a good rule of thumb but times have changed.
    Total home ownership costs shouldn’t exceed 30% of your gross income.
    ** I’d prefer a lower number myself.
    Your total debt servicing costs shouldn’t exceed 40% of your income.
    **Once again this number is too high for my preference.
    Don’t plan to retire with debt.
    **Don`t retire with debt.
    You need to have x times your annual income in life insurance.
    **life insurance is dependent on lseveral parameters and each person would have different requirements.

    Reply
  11. I think housing costs at 30% of income is quite high, but if that’s the max then I would agree. Aim for lower of course, I’d say 20%, especially if children are in the future (or present) and you have expensive hobbies (travel, golf..)

    We’ve kept about 3 months of expenses in a high interest savings account and another 3-4 months in a not-as-liquid investment account. We’d be able to access it if we wanted to it would just would be a bit more difficult.

    Reply
    1. Good on you to keep that much in an emergency fund. We’re not there yet but we do have a little bit saved away. Hopefully next year will be the year we get to where we want to be.

      Reply
  12. Nice article Mark,
    been following the site for a while now, and I see you post on CMF quite frequently so i thought I’d finally stop and say hi.
    The first rule caught me by surprise.

    “Your retirement income needs to be 70% of your working income.”
    I see where this rule has merit, and it probably applies to most people. But I think I would have to disagree with this one(at least if i were to apply it to myself). The reason why I disagree with this rule is because there are many people out there who earn six figure wages that live their own lives pretty frugally, and are able to retire early due to the fact they do not need to live on 70% of their income. I for one plan on retiring on 35%-40% of my income.

    nevertheless in order to have a healthy retirement meticulous planning should be done.
    Thank you for sharing and have a great day!

    Reply
    1. Good of you to say “hi” – what took you so long? 🙂

      I think the 50-70% rules applies to most people.

      Those folks that make six figures and live very frugally, probably don’t need to follow it. Even if they do, in retirement, they’ll run a surplus and this is a good problem to have at any age.

      I hope we can get buy on 50% of our working income, hopefully most of it can be funded from our investments and pensions. CPP, OAS and anything else is gravy. Hopefully…

      See you around this site and on CMF!

      Cheers,
      Mark

      Reply
  13. Overall I agree and most are good guidelines, but:
    – Your retirement income needs to be 70% of your working income.
    As no one knows what inflation will do before you retire, one should look to save continually and make those savings generate a GROWING income flow to keep ahead of inflation.
    – Keep an emergency fund equal to six months’ income.
    Everyone should always money available for emergency, or even a Line of Credit available.
    – Don’t invest more than 5% of your savings in any one stock or bond
    Of the 20 stocks I own, eight are over the 5%. No bonds, etf’s, gic’s or funds.
    – In retirement, you can sustainably live off of 4% of your next egg.
    Ignore fixed %’s. save for growing income.
    – The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.
    I don’t have any bonds or fixed assets. No growth or growing income from them.
    – Don’t plan to retire with debt.
    Mandatory!
    – You need to have x times your annual income in life insurance.
    I’m 72 and have zero life insurance

    Reply
    1. Thanks for the great comments Henry. I have no problem with keeping an LOC, or tapping into HELOC but I think an emergency is a bad time to borrow money which is why I hope to have an emergency fund of $10k, eventually. We’re simply not there yet.

      “Don’t plan to retire with debt. Mandatory!”

      For sure 🙂
      Mark

      Reply
  14. Now days, with jobs being so difficult to find (and hoping to find a job that pays relatively the same), I would plan on saving more than 6 months in an emergency fund. I found that when my husband was unemployed, we went through that fund so quickly it was terrifying.

    Reply
  15. I am working on paying off a line of credit to add to my emergency fund on top of the cash I actually have saved for it. It is not something that I want to ever use, but if I had to I would.

    Reply
  16. Coming back to : The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.

    I initially said 100% disagree and still disagree but with a nuance. I’m 54 and got 0% in bonds and fixed-income investment but I now got 35% placed in capital secured investment (epargne placements Quebec and Clarington Clic). My intent is to grow this portion of my portfolio to 60% by the age of 60.

    Reply
    1. Thanks for the update Hemgi. I’m tempted to stay at 0% bonds as long as I have a pension plan from work. If and when that changes, I will change my bond allocation.

      Reply
  17. Re 70% of income required for retirement:
    Strongly disagree with this statement and wish advisors would get away from it in its entirety. Retirement income has nothing to do with pre retirement income and these “percentage of income” statements mean little. When they make these statements they are assuming the working individual spends all their income. In my case I was fortunate to have a very good paying job about half way through my working years and spent about the same as most people living an average lifestyle. Probably spent about 55,000. after tax in todays dollars. My annual income was way, way more than this and accordingly the amount I required has no relationship to my earnings. I still live this lifestyle after being retired for 12 years and still spend nowhere near 70% of my income. Advisors must understand the needs and wants of their clients and not use a standard set approach to all. For this reason, amongst others, I distrust advisors.

    Reply

Post Comment