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Another day, another money rule. Find out if the premise behind the book, Rule of 30, is something you should apply to your income and retirement plans.
If you’ve never heard of the Rule of 30, welcome to the club. You may be hearing about it more though. This month, retirement expert and semi-retired actuary Fred Vettese is publishing a new book: The Rule of 30: A Better Way to Save for Retirement (ECW Press, 2021).
I thought initially this new rule sounded familiar: Back in 1998, another actuary, Malcolm Hamilton wrote the foreword for my co-authored book, The Wealthy Boomer, which talked about the Rule of 40, as it applied to mutual fund fees. The Rule of 30, however, is quite different.
In a nutshell, the 30 idea is a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for retirement. Rather than state something like save 10%, 12% or 15% of your gross (pre-tax) income each and every year, The Rule of 30 views retirement saving as occurring in tandem with daycare and mortgage repayment.
From the get-go, Vettese suggests young couples allocate 30% of their gross or after-tax income to those three major expenses: Retirement savings, daycare costs and mortgage payments. However, when starting out, they may have to save less in order to handle payments for daycare and the mortgage. Since daycare expenses are temporary after a few years or so (depending on how many children a couple has), once that expense has finished, they can ramp up the mortgage paydown and/or retirement savings. And if—ideally five years before retirement—the home mortgage is paid off, then couples can kick their retirement savings into overdrive by allocating a full 30%, or more, solely to building their retirement nest egg.
In a departure from his previous books, Vettese uses the pseudo-fictional approach first popularized by David Chilton in his perennially best-selling The Wealthy Barber. Vettese’s story, such as it is, revolves around a young couple named Brent and Megan, and their neighbour Jim, who is (conveniently!) a retired actuary.
In chapter 5 of the book, which formally introduces the Rule of 30, Jim says “You shouldn’t be bullied by retirement experts into saving more than you can afford … Saving for retirement will always involve some sacrifice, but there has to be a limit … If you pay more in a given year toward your mortgage, you should feel more comfortable contributing less that year into your RRSP. And vice versa.”
Asked why he adopted the much-imitated financial fiction approach [full disclosure: I succumbed to the same temptation myself in Findependence Day], Vettese told me he didn’t plan it that way initially. “I did a first chapter using that format, then realized it’s a lot easier to write this way and it’s not as dry: it’s somewhat easier to read and to write. When you get a problem, a character chimes in.”
Vettese confirmed the reason the Rule of 30 was unheard of before is because he made it up. “You can quibble whether it should be the Rule of 31 or 32, and it could vary by age. But it doesn’t really matter. It’s for people early in their career, 30s to early 40s, who need a rule of thumb.” And it doesn’t matter if this guide is precise because by the time they reach their early 50s, they’ll need to replace it with a calculator like the one he created for Morneau Shepell (more on that below).
Since Hamilton is acknowledged in the book, I asked Hamilton for his impressions. “Setting aside the number 30 for a moment, I have always believed that middle-class Canadians who marry, buy a house and have children cannot reasonably expect to save much for retirement until after the age of 45,” Hamilton tells me via email, “There just isn’t enough income to cover mortgage payments, the cost of raising children and Canada’s heavy tax burden.” Child care expenses and mortgage payments are generally non-deductible.
“I like the principle embedded in the rule of 30,” Hamilton says. “The principle being that young families do not need to, and cannot afford to, do everything at once.” This is especially true for today’s young couples who live in cities where expensive daycare and high house prices force them to choose between having children and saving for retirement.
Couples must prioritize, says Hamilton: “Should they first pay for their house and their children, and then start saving for retirement when the children grow up and the mortgage burden declines? Or should they first save for retirement and then try to buy a house and start a family in their 40s? The first seems like the better choice.”
Vettese has clarified that “30%” refers to gross or before-tax income earned. Hamilton says Vettese likely used 30 as a representative number that is reasonable for people who are considered “typical,” if there is such a thing.
“In the real world, the number will depend upon family income, number of children, anticipated retirement age, where you live, interest rates, stock market returns etc. Knowing Fred, he has taken all of this into account; so I trust his estimate.”
A final point is that those already near retirement or at it don’t need to worry much about the Rule of 30. It’s more a concept for young couples just embarking on family formation, when Retirement seems far away. In fact, Vettese suggests that after about age 55, couples should forget about the Rule of 30 and use focused Retirement tools to evaluate their personal circumstances and retirement readiness. The book includes a link to a free tool at www.perc.morneaushepell.com called PERC, or Personal Enhanced Retirement Calculator.
MoneySense Investing Editor at Large Jonathan Chevreau is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]
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“30% of their gross or after-tax income” Those are two very different numbers. Gross income is before taxes and deductions.
Try buying a house in Toronto today with the rule of 30?
Don’t have children yet, so exlcuding savings for daycare, I’m already contributing about 53% of my pre-tax income towards my mortgage and retirement (including ancillary costs associated with mortgage – utilities, internet, etc). 15% of that gross being for the retirement component.
I would say as of now I’m earning more than the average 35 year old living in a suburb of Vancouver, and while we bought in 2018 before the COVID fomo, it still wasn’t cheap. We are lucky enough to be in a single family dwelling but with the lack of government concern/policy to tamper runaway housing prices (why would they, our property tax skyrockets year after year and falsely inflates our GDP) I’m skeptical that this book has a real world application for most millenials and beyond. With the new FHSA to rollout, this should also serve to increase housing values because there will be more tax free money for the kiddos to throw around on bidding wars.
My complaint isn’t with respect to my situation, I consider myself extremely lucky to be in the position I am, but show me some real life examples of people in their mid 20s to 30s buying a condo at $800K plus that can realistically make this strategy work.
I get this book isn’t meant to apply to everyone, I just hope for the author’s sake it applies to someone
I made a Rule of 300 for myself. In planning for retirement I found it helpful to break down the time after age 65 to 300 months(25years). When dividing net worth by 300 it shows what is available each month. If the amount is sufficient in early years of retirement when a more active lifestyle is likely,one can assume the amount will sustain you later as well.
Did anybody proofread this article? In the 4th paragraph, he refers to “gross” and “after-tax” income as equivalents. They are clearly quite different. A mistake like this messes up the whole article.
Good Idea
This is interesting. But this line stumped me – “From the get-go, Vettese suggests young couples allocate 30% of their gross or after-tax income to those three major expenses: Retirement savings, daycare costs and mortgage payments.”
Those are 2 different amounts – which is it 30% of their gross income or 30% of their after-tax income?
Only applies if you earn high income. Most Canadians barely earn enough to pay the rent, especially if you have a PhD.
I like it. I’m 58 years old and only a couple of years away from a comfortable retirement. However I remember quite clearly in my 20’s & 30’s, reading all the financial advice at the time and feeling bullied or a failure because I couldn’t max out our RRSP contributions because I had child expenses and a big mortgage. I learned through time and experience that avoiding consumer debt, doing what you could when you could do it, living within your means will lead to financial independence. We saved very little for retirement until I was 47 years old, but we invested in the kids and paid off our mortgage. In general, I think the rule of 30 is an excellent way for most young couples to approach long term financial planning.
Presumably “mortgage payments” implies monthly rent for those who rent instead of owning. Renters also have a good chance of meeting retirement goals if they follow this rule.