Are you applying the 'Rule of 30' to your younger clients' plan?

Advisors urged to apply rule, which author insists results in a 'less painful way of saving'

Are you applying the 'Rule of 30' to your younger clients' plan?

Fred Vettese, Morneau Shepell’s former Chief Actuary, has uncovered “The Rule of 30”, which he’s urging advisors to apply to younger clients who may be worried they’re not saving enough for retirement.  

“I think we need a rule of thumb just to get us into our 50s, so we can almost get the sense of retirement in the distance,” he told Wealth Professional. “Once you get into your 50s, you can use a retirement calculator to figure out how much you’ve saved, so far, and how much money you still have to save to reach your goal. Then, you just apply whatever the retirement calculator tells you to apply. So, this ‘Rule of 30’ is just something to get you from age 25 to 55.”

Vettese, a retirement actuary, will release his new book, The Rule of 30, next week, but he said the biggest revelation was “that it doesn’t matter all that much whether you’re saving toward retirement or saving for a house, because those are interchangeable to some extent. So, I’ve uncovered a much less painful way of saving that still gets you to the same goal.”

He noted that this age group doesn’t need to worry about putting 10% or 12 % of their pay into registered savings plans from the beginning of their careers versus paying down the mortgage because the ‘Rule of 30’ says it’s just as effective to save 30% of gross pay for a combination of retirement, mortgage payments, and special things, like day care, which is costly, but short-term, as it is to save a smaller percentage over a longer-term.

“There are times in your life when it’s just going to be really hard to save for retirement,” said Vettese. “If you’re 35, with a spouse and two kids and you have a mortgage that you’re paying off, and you’ve got day care on top of that, and you’ve got people telling you that you must save 10% for retirement, you’re wondering, ‘where does that come from?

“In the book, I proved that you don’t really have to save toward your retirement every year of your career. There are some years where you can just take a break and maybe only save 5% or even zero, and you’re going to make up for it in other years, like when your mortgage payments aren’t quite as hefty a percentage of your pay or day care is behind you and you have more disposable income. That’s when you raise what you’re saving toward retirement. I proved that you can still save enough by doing that – and it’s a lot less painful.”

It’s an idea that he wants advisors to seriously consider because it will more easily get their clients to the same goal.

“I was a retirement actuary, so it’s not like I’m trying to give retirement short-shrift,” he said. “I know a lot of 30 to 50 year-olds who just can’t save for retirement right now, so I’m just trying to be realistic.”