Rule Of 30

Frederick Vettese

Description

'Consider the age-old question of how much you should save to enjoy a comfortable retirement: Are your knees knocking? Are you nervously biting your nails? In The Rule of 30 personal finance expert Frederick Vettese provides a surprising and hopeful answer. Through conversations between a young couple and their neighbor, a retired actuary, the couple and the reader discover: How they would have fared had they been saving over various periods in the past, and how the future investment climate will differ The problem with saving a constant percentage of pay The Rule of 30 and why it is a more rational way to save Whether investing in real estate is a viable alternative to investing in stocks The Rule of 30 changes the mindset from saving the same flat percentage of pay to saving when it is most convenient to your situation. In most cases, it means less saving early on while mortgage payments

Sujets

• Personal finance

Informations

• Publié par: Ecw Press
• Date de parution: 19 octobre 2021
• Nombre de lectures: 0
• EAN13: 9781773058337
• Langue: English

Extrait

The Rule of 30 A Better Way to Save for Retirement
Frederick Vettese


Contents Dedication List of Tables and Figures List of Acronyms Foreword PART I: Lessons from the Past Chapter 1: How Much Should You Save? Chapter 2: It Was the Worst of Times Chapter 3: Converting a Lump Sum into Annual Income Chapter 4: A Realistic Retirement Income Target Chapter 5: Should You Pay Off the Mortgage Early? Chapter 6: Introducing the Rule of 30 Chapter 7: Stress-Testing the Rule of 30 Chapter 8: The Vulnerable Years Chapter 9: Using Asset Mix to Improve Returns Chapter 10: Refinements to Your Investing Approach Chapter 11: Invest in Real Estate Instead of Stocks? Chapter 12: Is It Better to Rent or to Own? Chapter 13: One More Enhancement Chapter 14: A Final Look at the Past PART II: Why the Future Will Be Different Chapter 15: Pondering the Unknowable Chapter 16: Bonds Will Underperform Chapter 17: Interest Rates Will Remain “Low for Long” Chapter 18: The Unpredictable Stock Market Chapter 19: Putting It All Together PART III: Denouement Chapter 20: Rounding Out the Picture Chapter 21: Graduation Day Chapter 22: The Big Picture Appendix: Pensions from Government Sources Acknowledgements Index About the Author Copyright

Dedication
To Gregory, Troy, Michael and Alex

List of Tables and Figures Figure 1: Average returns on a 60-40 asset mix Figure 2: The importance of CPP and OAS Table 1: Spending highlights during the working years Table 2: Annual mortgage payments Table 3: Child-raising costs Table 4: Other pre-retirement costs Figure 3: Breaking down pay (when saving 12%) Table 5: Annual mortgage payments Figure 4: Where the money goes (if mortgage is paid early, percent of pay) Figure 5: Where the money goes (if the mortgage is paid early, constant dollars) Figure 6: Spendable income varies widely (if saving 12%) Table 6: Special expenses and retirement saving (% of pay) Table 7: Retirement saving as a balancing item (% of pay) Figure 7: Where the money goes (Rule of 30) Figure 8: Spendable income is less variable Figure 9: Rule of 30 produces smoother spendable income Figure 10: Jeff and Sandra start late but can still retire well Figure 11: Spendable income with lower pay in last five years Figure 12: 100 percent stocks is usually better than 60-40 Table 8: A TDF approach to asset mix Figure 13: Even good market timing doesn’t work Table 9: Assumptions that Jim used for the real estate example Figure 14: Owning versus renting — wealth after 30 years Figure 15: Closing the income gap by saving more in later working years Figure 16: Result in a more typical historical period Figure 17: History of price inflation in Canada Figure 18: Wages tend to rise faster than prices Table 10: Future pay increases for Brett and Megan Table 11: Best estimate of future inflation Figure 19: Long-term bond yields are bottoming out Table 12: Ratio of savers (55–80) to borrowers (25–54) Table 13: 10-year government bond yield Table 14: Jim’s updated forecast Figure 20: Price-to-earnings ratios (S&P 500) Table 15: Jim’s whiteboard forecast Table 16: Forecast versus long term Table 17: Forecast versus a similar past period Table 18: Forecast versus the most recent 30 years Table 19: An alternate forecast Figure 21: The future based on Jim’s main forecast Figure 22: The future based on Jim’s alternate forecast Table 20: Assumptions used to compare renting versus buying Figure 23: Saving 10 percent since 1990 and retiring in 2019 Figure 24: Saving from 1990–2019 with the Rule of 30 Figure 25: A spending breakdown under the Rule of 30 Table 21: Details underlying Figures 23 and 24

List of Acronyms
The various retirement-related acronyms that are used throughout the text are all shown here, along with the chapter in which they first appear.
CPI
Consumer Price Index for Canada ( Chapter 2 )
CPP
Canada Pension Plan ( Chapter 2 )
CRA
Canada Revenue Agency ( Chapter 5 )
CCB
Canada child benefit ( Chapter 4 )
DB
defined benefit, as in DB pension plan ( Chapter 9 )
DC
defined contribution, as in DC pension plan ( Chapter 7 )
EI
Employment Insurance ( Chapter 4 )
ERP
equity risk premium ( Chapter 18 )
ETF
exchange-traded fund ( Chapter 9 )
OAS
Old Age Security, usually in reference to OAS pension ( Chapter 2 )
QPP
Quebec Pension Plan ( Chapter 1 )
P/E
price to earnings (ratio) ( Chapter 18 )
PERC
Personal Enhanced Retirement Calculator ( Chapter 6 )
RESP
Registered Education Savings Plan ( Chapter 7 )
RRSP
Registered Retirement Savings Plan ( Chapter 1 )
RRIF
Registered Retirement Income Fund ( Chapter 3 )
TDF
target date fund ( Chapter 9 )
TFSA
Tax-Free Savings Account ( Chapter 6 )

Foreword
To say things have changed over the last few decades would be an understatement. For the most part, these changes are right before our eyes in the form of smartphones, connected cars, streaming content and nearly unlimited information at our fingertips. But some changes are not so obvious.
Consider saving for retirement. Between defined benefit pensions and high risk-free interest rates, preparing for retirement used to be easier from the individual’s perspective. Unfortunately, defined benefit pensions are now virtually extinct, at least in the private sector, and real interest rates are essentially non-existent.
Among employers who do offer pension plans, the move from defined benefit to defined contribution plans has transferred much of the onus to individuals; and for the far too many Canadians who have no workplace coverage at all, the responsibility of saving for retirement is entirely theirs. This leaves the average individual more at the mercy of the capital markets than ever before. To see how this sea change affects saving for retirement, we must shed some old assumptions and look more closely under the hood. More than that, we must look closely at ourselves and our habits if we are going to be able to overcome the new financial challenges we face.
As the founder of Purpose Investments, cofounder of WealthSimple and someone who has dedicated my life to making investing more structured and accessible to Canadians, it goes without saying that I strongly believe in the importance of saving for retirement. This is what has attracted me to Fred’s thinking and work over the years. I have always found Fred to have a clear perspective on the challenges we face, as a society and as individuals, in thinking about and preparing for retirement.
But how do we get this clear thinking into the hands of every Canadian and then help them implement it? This book is a great start, whether you are a young professional beginning your career, or if you have just gotten over the daycare hump and your kids are now at the point where they are starting to realize you are not as cool as they once thought.
This book neatly frames the problem many young Canadians face in trying to figure out how much they should save each year. People generally understand that this is something important to do, whether it is an afterthought following the purchase of a home or a luxury item or a conscious question they ask themselves after they receive their first paycheque. But answering the question can involve so many variables that the task can feel overwhelming. With the time for retirement so far in the future, it is much too easy to defer answering the question until it is too late.
For most people, successfully saving for retirement is a matter of forming good habits. To do that, the importance of saving must be recognized and acted upon. And the earlier you do this the better, because time is your greatest ally in achieving your retirement goals. You do not even need to have specific goals to get started saving. You can decide how to live and spend your money further down the road. But if you do not save, you will not have many options.
“The Rule of 30,” as Fred describes, solves this problem by providing a very thoughtful yet easy-to-follow framework for young Canadians. It allows them to take the first step to begin saving for retirement, regardless of their financial situation. The framework is flexible and adjusts to your life stage, taking into consideration both your current and potential future salary and expenses.
Once you are much closer to retirement, you will need to look more closely at your overall financial situation to define your retirement goals and to ultimately understand if you are ahead, on track or behind schedule for meeting them. When you reach that point you can make the appropriate tweaks, if required. But without a base of retirement savings gradually built up over the years, there will be nothing to tinker with and retirement may be an elusive goal.
Another hurdle to overcome is the expectation for returns on fixed-income securities. Thirty years ago, you could count on a 7 percent income in retirement simply through buying high-quality bonds. Today, that same portfolio would garner a return of under 2 percent, likely earning a negative return when inflation is taken into consideration.
One of the most dangerous things we can do when it comes to saving is to assume that what has worked in t