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 %|
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.
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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.
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.