The Rule of 30 – Review
There are lots of ways to save for retirement. Read on for my The Rule of 30 review.
“The Rule of 30 attempts to reduce the amount of sacrifice that is needed. It aims to make this balancing act more manageable by allowing three of the four categories – mortgage payments, spendable income and retirement savings – to vary year by year as circumstances dictate.” – Fred Vettese, author, The Rule of 30.
If you haven’t heard about The Rule of 30 and this saving for retirement rule, fear not – it’s certainly not the only savings approach marketed for retirement planning but it could be the most pragmatic based on how you approach savings.
Retirement expert and semi-retired actuary Fred Vettese released a new book a few months ago entitled The Rule of 30: A Better Way to Save for Retirement that considers the challenging balancing act many of us have when it comes to saving for retirement.
What is The Rule of 30?
Succinctly, The Rule of 30 is this:
Accounting for the two competing priorities of mortgage obligations and raising a family (via daycare costs), this rule suggests you take a graduated approach to saving for retirement – less so in the early years and more so in the latter years once those early debt repayments and early family-building financial obligations are largely done.
In tabular form, referencing pages 49 and 50 from Fred’s book, this rule in practice could look something like this:
| Ages/Age Range | Mortgage % | Daycare % | Sub-Total Sum % | Retirement Savings % (money leftover to save) | Total % |
| 33-37 | 20 | 7 | 27 | 3 | 30 |
| 38-42 | 11 | 2 | 13 | 19 | |
| 43-47 | 22 | 0 | 22 | 8 | |
| 48-52 | 22 | 0 | 22 | 8 | |
| 53-57 | 15 | 0 | 15 | 15 | |
| 58-62 | 0 | 0 | 0 | 30 |
Note: % expressed as a function of total household spending, average spending based on five-year intervals.
So, Vettese suggests young couples/growing families allocate give or take about 30% of their after-tax income to those three major expenses (mortgage payments, daycare costs and retirement savings) such that they balance today’s needs with long-term, necessary retirement planning – without overburdening themselves financially.
Other saving and investing retirement books from Vettese
Before I offer my personal take on The Rule of 30, I wanted to share a few other retirement planning books written by Vettese in case you haven’t read them yet – they are both worthwhile IMO:
Retirement Income for Life – including free calculators to help your retirement planning estimates.
The Essential Retirement Guide – chapter by chapter guidance to ensure you consider the following key financial objectives leading to, at and during retirement:
- Save 10% of your pay each year.
- Invest it in low-cost pooled funds, weighted towards equities.
- Keep the asset mix the same, through good times and bad.
- Apart from the mortgage, avoid going into debt.
- Pay off your mortgage by the time you retire.
- Buy a life annuity at retirement.
(Note: I like all these simple steps above, except #6 but your mileage may vary!)
The Real Retirement – offers insights and alternatives to help you fund your retirement, including why many Canadians need not worry about retirement income rules of thumb such as saving 70% of your current, pre-tax income. That’s far too much…
Does The Rule of 30 work?
Yes, it might to a point.
This rule is certainly a more appropriate for some people, beyond a flat percentage format, for a few reasons:
- I like this rule because it acknowledges the 20, 30 and 40-somethings have many competing financial priorities – it recognizes that there is only so much money to go around.
- I like the graduated approach. It is nice to see a model whereby as some expenses moderate or disappear entirely over time, retirement savings ramps-up to fill the gap accordingly.
A few immediate downfalls I see with this rule are:
- It has a bias to couples or young families and it’s very focused on the age 30-45 cohort, so as a consequence…
- It doesn’t really apply to folks in their 50s whereby if you haven’t saved adequately for retirement by this age – not that it’s never too late to start – far more drastic and precise calculations for any retirement planning might be needed.
- The more you save, early, the faster your money is working for you and compounding away. Time does the heavy lifting. Waiting until your 40s or 50s to pump money into retirement savings ignores the power of compouding – arguably the most important personal finance rule of them all.
Is there a best budgeting rule of thumb?
I’m biased (since this approach has worked for us for almost two decades now), but I like setting up automatic bill payments from savings to investment accounts and sticking to a pay yourself first approach, ideally 10% net income to start and increasing that over time.
The reason I feel this is the best budgeting rule of thumb is because it’s simple, it’s automated, and I don’t feel any guilt when it comes to spending money that is leftover. We tend to pay ourselves first, and all spending goes from there.
The Rule of 30 – Review Summary
The Rule of 30 offers much more than the table I provided above, a potential answer to many younger Canadians that feel they can’t save for their retirement every year of their career. Like other Vettese books, it leverages his actuarial expertise to provide detailed information on Canada Pension Plan (CPP) expansion, and big picture subjects such as investing in real estate over stocks and using asset class mixes in stocks and bonds to improve portfolio returns.
This book is well suited for beginner investors seeking to understand what options might be available to them for retirement savings approaches, looking for an easy read.
Enter below to win a copy!
I will draw one lucky reader name at random and mail the winner the book. Good Luck and thanks for entering this summer giveaway!
Another way to enter, via this link!
Further Reading:
These are the top, free, retirement calculators to use. Enjoy!
One of those handy calculators is the PERC – Personal Enhanced Retirement Calculator. This easy tool lets you estimate how much income you can draw from all of your financial assets in retirement – in very general terms. It is based on the ideas outlined in Retirement Income for Life: Getting More without Saving More.
https://perc.ecm.lifeworks.com/
One of the best personal finance books I’ve read in recent years is The Psychology of Money.
In this My Own Advisor case study, I helped a reader understand if they can retire at age 55 during periods of much higher inflation.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Just noticed this giveaway so here’s hoping!!!!
Never too late to gain any type of knowledge that may be of value or be able to be pay forward thus the entry for the book & thanks again for the great blog Mark!!!
Thanks Dale, good luck!!
Mark
I thought fred vettese does suggest a fixed amount as an alternative. Was it 12%? I can’t remember
Hummm, I’d have to look Christina. Vettese might be a fan of an equity fan glidepath re: rising equities over time in retirement to fit longevity risk and take advantage of growth. What are your thoughts on that? Cheers.
I always enjoy Fred’s books as he lots of ideas. I think you should use a percentage of gross income instead of net income however. All working Canucks pay into CPP which represents a few saving percentage points. Over 6.5 million Canadians have a RPP of which 4.3 million are DB.(Statcan 2020). That represented over 13% of my gross income. CPP and pension payments combined were 16% plus of my gross teacher’s pay. When I added on mortgage payments (principle), rrsp, tfsa, emergency fund payments I was setting aside 30% of my gross income.
Bottom line – automate savings . My kids opened RRSP and TFSA ASAP and automated $50/ month. They now have a head start.
Love Fred Vettese, I read the retirement income for life and it was the best retirement planning and in-retirement personal finance book I have read. This book no doubt is a great read for the generations pre-retirement. Thanks for reviewing.
I agree with you.Fred Vettese’s books is a must for anyone serious about planning their retirement.
Indeed! Well done books!
Thanks Gin, it is a well done book! Thanks for your comment.
Mark
I read that book at least a year ago and thought pretty much the same thing as you Mark.
Thanks Deane. A good book, some good (and recycled principles from other Vettese) books but that approach has not been for me.
Keep up the great fitness work, impressive to follow. Off for summer travel soon!
Nor me either.
Thanks Mark. Good luck with your fitness stuff.
Have a fantastic trip. We’re heading off for a few days next week.
Nice, same to you! Pics to come on the Twitter machine.
Best wishes.
Back in the day, when the interest rate on mortgages was 15-18%, I focused on putting every penny I could toward the mortgage. Every time I got a raise, half of the raise went to paying off the principal. Once our first mortgage was paid off, we focused much more on investing for retirement. We did eventually buy a slightly larger house in a better neighbourhood, but by then, our single income family was able to quickly pay off that mortgage and invest for retirement. Because we were very used to being very frugal, and my income had grown much larger, we easily met our retirement savings goal. We have been retired for about 10 years, and we are having a very pleasant retirement with little risk of running out of money. We are lucky enough to be able to reinvest/gift a portion of our income each year. I feel very lucky, but in the beginning, we sacrificed a lot to get where we are today.
“Because we were very used to being very frugal, and my income had grown much larger, we easily met our retirement savings goal.”
Awesome Jo. I suspect those very high interest rates of the 1980s were a huge lesson to you to expect the unexpected financially and live far below your means. Sometimes, luck is just having a conservative mindset.
Continued happy retirement to you Jo!
Mark
Why does the morgage % raises to > 20% for the period 43-52? Home lifestyle inflation?
Potential home upgrades/upscale and/or the ability to pay it down more quickly with higher paying jobs, salary increases. A few factors in the book Vettese considers. Hope that helps!
Couple thoughts… Might be an effective strategy for some, IF they can stay on top of it and maintain the allocation over time. Easy to forget about 10 years down the road, especially if you have 70% of your income left for lifestyle inflation. In fact 30% might be a touch low for most Canadians to cover housing and daycare! If it does, surely you should be saving some of that 70% left over. I also agree with your 3rd point about missing out of the time factor helping the investments compound. At the end of the day, as long as people start saving something for retirement as soon as possible. Cheers
Thanks for your comment Mechanic! Nice to hear from you 🙂
I would think 30% is very low for mortgages and daycare. I would anticipate some 30- and 40-somethings are closer to 50% easily on those two items alone. Yet, inflation is helping housing prices to start to come down/soften. That’s good.
Mark
Lots of problems with that rule. One, it doesn’t consider income versus expenses. If you are a high earner then you can easily dedicate way more that 30% of your income to mortgage and daycare. And if you are a single income couple with a high earner then you can forget daycare costs. I think it’s important to max out retirement accounts from day one and to figure out how to live on what’s left. I know that won’t work for low earning people, but if you don’t at least take advantage of employer matching contributions to retirement accounts that is just throwing free money away.
Agreed, U.S., Canada, or otherwise, I’ve said from Day 1 to try and maximize contributions to any tax-deferred or tax-free accounts the governments of the day allow you to have. Then, ideally, you live on the rest.
Most people I think have it a bit backwards, they figure out what they can spend and then try and find ways to save for retirement thereafter.
I think/I’ve always believed it’s important to set aside 10% or so of my net income, and then figure out what I have to live from based on what is leftover.
Everyone is different, though!
Great comments,
Mark
Agree. Max out all registered accounts and then you can go ahead to spend what ever left. If people can do this, basically kids’ education and parents’ retirement are already covered.
Thank you Mark for the book review. The table looks very interesting. I have always heard of “saving 20%-30%” of your income for retirements, but it is not very attainable for people in their 20s-30s due to lower entry-level salary, or high cost of living in major Canadian cities. Uut the 3% number for Age 33-37 cohort is much more achievable. This is very encouraging if one can follow this table (and if the math is right) and secure retirement financially.
Yes, an interesting model for sure, Ye. I think it’s a good idea to look at options/different models for saving for retirement but the reality is, starting early, saving often and continued saving is really the best plan IMO!
Mark
This has been a very interesting and inspring article! thanks!
Thanks Russ!