Blessed by the Potato

Budget 2022 proposes to introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home—including investment income— would be non-taxable, like a TFSA. Tax-free in, tax-free out.

The new Tax-Free First Home Savings Account (FHSA) is pitched as a way to save up for your first home. It’s like a super-charged RRSP: you get to put pre-tax money in, and in one specific circumstance (buying a home), you can take it out tax-free. And if you don’t buy, you can roll it into an RRIF like a regular RRSP.

There’s lots to nit-pick with this idea: the $40k lifetime limit doesn’t make it much more effective for saving for a home than the old HBP option did. And while this is even better as you don’t have to pay it back and get to keep that tax savings, that’s a benefit you only see in later years vs the HBP — the $35k HBP was already letting you put that much pre-tax money to work for the purchase itself. On top of that, the $8k yearly limit means it will take 5 years to max out (and 4 to match what you could do in 90 days with the HBP and a regular RRSP). So at least it will push demand out if some people want to max it out before buying.

It’s a bit regressive, in that people in the highest tax brackets will see the biggest advantage from using the FHSA.

However, ignore all of the talk about using it for a downpayment. The fact that they took out the age limit and let you roll it into an RRIF mean that the FHSA serves another purpose: it helps renters shelter more investment income, functioning basically as more (and with an embedded option!) RRSP room. Someone who buys a place gets any increase in equity as a tax-free gain thanks to the principal residence exemption. That’s been a huge windfall in recent years, and can push people toward buying in an environment where prices are going up double-digits every year. That tax advantage also makes it even harder for those who don’t own to keep up. Someone can choose to rent instead and save the difference in monthly cashflows, but may soon run out of TFSA and RRSP room. An extra $8k/yr will help them shelter more of those gains.

And of course, provide that option to take the whole FHSA out at some point in the future to buy, tax-free.

Imagine a world where the cap and 15-year lifespan were removed and renters continued to get $8k/yr in room until they bought or turned 71 (and rolled it into a RRIF). Someone renting in a big, unaffordable city like Toronto could prioritize their FHSA, knowing that it would make it that much more possible to eventually buy when their indentured servitude in the city was over. $8k/yr at a 5% return would leave someone with nearly $400k after 25 years*. You could make a solid plan to do your time, renting happily along the way, and know that you could — tax-free — have nearly enough to buy a place in the boonies outright when your commuting days were done. Or, have more in your RRSP to support the costs of lifelong renting in retirement if you stayed in the city.

So while I don’t think this was a necessary thing to create (indeed it adds more complication to our tax and savings account system, and yet another financial literacy hurdle), and don’t think it’s going to do a damned thing for housing affordability… I welcome the FHSA. For many people, it will be the obvious first account to fill (even edging out a TFSA for those who plan to buy eventually). However, to be truly great and to help incentivize more people to rent and invest the difference and keep open the option to buy in the future, they’ll have to remove the fairly low lifetime contribution cap.

Indeed, I’m not sure many brokerages will bother to offer registered accounts that can only ever accept $40k, and are only available to the subset of renters who save money to invest — see how few bother to offer RDSPs.

* – remember that this is a hypothetical where they remove the cap and time limit. As it stands, the 2022 Federal Budget proposes a $40k lifetime cap and a 15 year maximum term to either buy a home or roll it into a RRSP/RRIF.

Perhaps Commissions Aren’t So Bad

Dan Ariely talks about the difference between free and nearly free. Nearly free and free have basically the same effect on your overall net wealth: whether you pay 14 cents in ECN fees every month or zero as you accumulate your investments is going to have no measurable impact on your ability to retire. But the difference between a few cents and free on your trading behaviour is huge — people will trade a lot more when it’s free. Plus the sales commission on the selling side for Questrade is good for investor behaviour: not high enough to actually be a real barrier to selling, but puts just that little bit of psychological stop in before selling and prevents dabbling in day-trading.

So I’m worried these days that so many people don’t ask “what’s a good brokerage to use?” but “which investing app should I use? Is Robinhood in Canada?”

And as much as lower fees are better, perhaps there’s a behavioural benefit to paying a little bit of commission and we shouldn’t encourage zero-fee platforms. Plus these companies make money somehow, which may include providing worse fills (though that doesn’t seem to be allowed in Canada).

Smartphone Addiction

Your smartphone is an ingenious device, carrying more power than the desktop computer I had in university, and able to carry out many very useful functions. It’s no wonder many of us have them practically welded to us. But they are an insidious thing: they short-circuit our brains in some of the worst ways.

Paying by mobile phone reduces the pain of paying even beyond that of using a credit card, so it’s all too easy to impulse buy something and not even notice how much you spent with that tap. And so many apps are addictive (sometimes purposefully so) that just touching your mobile phone short-circuits all of your careful reasoning faculties. [only a modest exaggeration on my part]

Do. Not. Trade. On. Your. Phone.

Investing Apps

Long before there was daytrading involved, WealthSimple bragged about how a third of their users checked in with the app daily. Daily! For a robo-advisor. There’s nothing to do! The whole point is to have a long-term investment plan that you don’t have to babysit!

From their point of view it was great: more mindshare, better odds that someone is checking on their phone and a friend goes “oh hey what’s that.” So of course they loved it. But I was horrified. Setting aside the unhealthy relationship people had with their phone and this app, it was setting investors up for loss-aversion disappointment (or panic): the more often you check in on your portfolio, the more likely you are to catch a downturn and see that you’ve lost some money.

So mobile phone investing apps had a horrifying relationship to engagement and addiction before they threw day-trading into the mix.

Do. Not. Trade. On. Your. Phone.

Dark Patterns, Advertising, and Active Investing

The trailblazer in no-commission app-based trading, the brand that has become synonymous with the product itself, is Robinhood in the US. And Robinhood has been criticized for its dark patterns, gamifying parts of the user experience to encourage people to trade more often and make more speculative bets. For example, they’d flash digital confetti up on the screen as a kind of reward/congratulations for placing a trade, and list trendy stocks.

Now WSTrade looks to be copying some (but thankfully nowhere near all) parts of the playbook, with a mobile-only [update: mobile-first, as I took forever to publish this and got scooped in some ways and they now have a desktop web version] app, offering zero commissions and fractional shares. And they’ll give you a free stock, to really drive home that idea of trading individual stocks, with a lottery-like component (will your sign-up bonus be a penny stock or a really valuable share?).

They also moved beyond stocks into an even more speculative space with crypto trading. And while not a dark pattern within the app itself, their ads are highlighting all the new speculative investments you can trade with them (rather than focusing on the good parts, like that you can do long-term investing in an all-in-one ETF with no commissions — in fact I can’t say that I’ve seen a single ad along those lines).

In the US case at least, there are plenty of stories of people getting caught in things they don’t understand and losing lots of money — whether through mistakes, or through functionally a fully enabled gambling addiction. Thankfully, here in Canada investing apps don’t push users toward derivatives to add risk on top of daytrading, though they are moving toward “instant deposits” to wipe out any chance for cooling off periods and do include crypto. And the “first stock” promotion of “up to $4,500!” reinforces the gambling aspect of investing, and fractional share ownership promotes speculating in individual securities long before a user is ready for that.

And that’s not to mention fat-finger trades — how many typos have you made texting on that device?

Do. Not. Trade. On. Your. Phone.

Academic Research Backs Me Up

Two recent papers back up my instinctive refrain that you should not be trading on your phone.

First, Does Gamified Trading Stimulate Risk Taking? looks at the gamification aspect:

“We find that gamification “nudges” participants to take on more risk, particularly when trading high-volatility assets. The effect is stronger for inexperienced traders with lower financial literacy.”

You can read a more lay-friendly version here.

Their finding on the moderating influence of financial literacy gives me some hope. However, it also worries me, as people with low financial literacy are the ones now searching for “investing apps” rather than “best brokerage” – the term brokerage is almost entirely missing from new discussions on Reddit, for example, so the people using these apps are much more likely to be the low-finlit ones most susceptible to the gamification, gambling, ads, and dark patterns.

Next, Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior looks at people’s behaviour when trading on their phone.

“we find that smartphones increase the purchase of riskier, lottery-type, non-diversifying assets, and of past winners and losers. […] following the launch of smartphone apps, investors are—if anything—more likely to purchase risky, lottery-type, and non-diversifying assets as well as chase winners and losers on non-smartphone platforms. […] We find evidence against investors offsetting these trades on other platforms and against digital nudges mechanically driving our results. Smartphone effects are neither transitory nor innocuous: assets purchased via smartphones deliver lower Sharpe ratios. Our findings caution against the indiscriminate use of smartphones as the key technology to increase access to financial markets.” [emphasis mine]

That reinforces my more instinctive view that even touching your phone short-circuits your self control thought: simply trading on your phone increases the likelihood of buying riskier things, and it infects your trading even off your phone. They also include a reference to another study on purchases, supporting the idea that smartphones reinforce system 1 thinking, where people ordered more unhealthy food on their mobile devices.

Conclusion

If you’re looking to start investing, do not look for a zero-commission “app”. Start by reading, and then open a brokerage account and only use your desktop/laptop to trade. Even if the brokerage you ultimately choose has a mobile app, don’t use it, as even occasional usage may change your appetite for lottery-like stocks. Controlling costs is important and a virtue, but zero costs changes our behaviour in ways that may be counter-productive. A few dollars here and there (or even $10 big bank commissions) are not going to derail your long-term plan, but may keep you from trading more than necessary. And finally:

Do. Not. Trade. On. Your. Phone.

I wasn’t sure how I would react to Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs by Dan Bortolotti after his announcement post, which said “What was needed, I recognized, was a step-by-step guide to designing, building, and maintaining a portfolio of ETFs over the long-term.” My Dude, I thought, that book already exists and it is called the Value of Simple.

But that’s the reaction of someone who spent too long in Science, where you have to cite prior work and it’s hard to publish replication studies. In art there’s all kinds of room for cover songs, and RYP actually has a really nice harmony with VoS.

Preaching to the Choir

RYP fully assumes that this is not your first book on investing, and so doesn’t spend much time on the basics like “what’s a stock?”. It dives right into “stop trying to beat the market!” Which I suppose fits very well with the title: you must first have a portfolio to reboot it.

Dan clearly and convincingly makes the case for why you shouldn’t try to beat the market, and why indexing (and specifically market cap weighted indexes) are the way to go. There’s a good section on factor/smart beta and why he doesn’t go for it.

He also has much more on building your plan before you invest, and how that influences your choice of investments and your ability to stick with them. Importantly, the planning section includes some key questions you should ask yourself as you’re building your plan.

RYP includes much more detail on how ETFs are built and the alternatives (e.g. smart beta), currency implications, etc. The book spends a bit of time digging into tracking error and transaction costs: the more advanced stuff that VoS doesn’t touch — again, a great complement. He also addresses head-on the common misconception about ETFs that track similar indexes having different prices: one is not “cheaper” or “a better value” just because the price per unit is lower. The price per unit is fairly arbitrary.

He also has a section on cutting ties with your advisor, to prepare you for the common arguments they might make. One addition I like a lot is his point that “You don’t need to change each other’s minds.” “There’s no point engaging in an argument with an advisor you’re planning to fire. He or she may be using fear tactics to encourage you to stay, which is unprofessional and provides another reason for you to cut ties.”

Then he has guidelines for how to buy your ETFs. He doesn’t go into quite the screenshot-level detail of VoS (which will also save him from having to release a new edition every 3 years — smart compromise), but hits all the main generalizable points, including using limit orders and rounding down your number of units.

Nitpicks

It wouldn’t be a BbtP review without nitpicking, but I have basically none. {gasps from the crowd}

The one thing that got me was my own bugbear (which is admittedly being pedantic on one page): in the TFSA-vs-RRSP bit, his RRSP description is missing the pre-tax nature of RRSP contributions. You should not pick an RRSP over a TFSA because it gives you a tax refund — you should be re-investing that refund anyway (or getting it back after grossing up or whatever). Yet Dan says “And if your income is significantly higher–once you’re in the six figures, you’re being taxed at more than 43%–then prioritizing the RRSP is almost a no-brainer, because that tax deduction is so valuable.” [Emphasis mine] This is the thinking that gets people to not add more to their RRSP to account for that gross-up/pre-tax bit, and then complain when they hit retirement that they have to pay tax on their RRIF withdrawals.

If you’re in a high tax bracket the RRSP is usually the better choice because there’s a higher chance you’ll be in a lower tax bracket later. The current tax deduction has nothing to do with it. If you have say $5k to save today and are debating between putting $5k in your TFSA or RRSP, putting $5k in your RRSP and enjoying a tax refund means you’ve really only saved $2850 — you had to contribute $8.77k to your RRSP [at that 43% tax rate] to have an equivalent situation to $5k in your TFSA (and then your tax deduction just brought you back to the same state as the TFSA, it was not valuable on its own).

I will note that he got it right immediately before that: “if you were in the same tax bracket for your whole life, the TFSA and RRSP would be essentially the same… an RRSP is particularly useful if you make contributions when your tax rate is high, and then make withdrawals when it’s low.” And to be fair, that this is something tonnes of otherwise careful experts get wrong (sometimes on purpose — people are irrationally motivated by tax returns, so selling them on saving and investing in their RRSP to get one works to get them to save and invest something much more so than a long, carefully worded explanation about pre-tax amounts — investing the same amount in a TFSA may be better, but that’s not always the counterfactual).

So Which One Should I Get?

As much as I have a conflict of interest, get both Reboot Your Portfolio and The Value of Simple. The lessons are important and it’s good to reinforce it, and now you’ll get it from two different voices from different angles to really help drive it home.

VoS is very purposefully designed for people who are not (yet!) DIY investors. It’s main criticisms have been that it is too simple, which I eat up. So if you’ve never made a trade on your own before (or are shopping for a friend or relative in that situation), I would suggest that you start with VoS, and then read RYP to reinforce the take-home messages of indexing and the value of all-in-one funds, and get those extra details on why you should pick certain index funds.

If you are already an investor, and are confused by all the different strategies out there (growth? dividends? crypto? meme… stonks?) then get RYP. VoS has more detail on what happens next for beginners (how do you read a statement, what are taxes and what do I have to do) if you’re confused on that after reading RYP, but if you’ve already opened a brokerage account and know how to use it, and are mostly stuck on convincing yourself to go with a simple index ETF route, BYP will probably be better at convincing you of that and will likely be all you need.

When they announced a move to commission-free trading (and fully free, not just a few cents for the ECN), I knew I was going to have to open an account there and add it to the book and course as an alternative to Questrade.

I’m not going to get too far into the details of the platform: it’s a brokerage, it has a proper desktop web interface {shade. thrown.}, you can buy your all-in-one ETF and pay no commission.

Neat features: the order entry screen updates how much cash you’ll have left after the order in real time as you change your ask price and quantity. This may help prevent that rare mistake where someone rounds up on their division step instead of rounding down, and tries to buy one share too many.

The account opening procedure was very modern and slick: I filled out all the forms and then it sent a link to my phone so I could take a selfie and a photo of my ID to confirm my identity. I had all that submitted in very little time, and in 4 days my account was open and ready for funds to be added.

However, that slickness wasn’t without it’s issues.

Minor issues: First off, my driver’s license wasn’t accepted as valid ID during the sign-up process. I suspect it’s because the application automagically filled in “North York” as my city when I entered my address, but my license says I live in “Toronto”. I was able to complete the sign-up by using my passport to verify my identity, though (which doesn’t have an address listed).

Second, I entered all my chequing account information, which they were supposed to be able to use to further verify my identity (sending me off to Tangerine’s sign-in page, kind of like how the CRA’s partner sign-in works). That failed, too, but didn’t stop the application process. I manually entered my chequing account information (transit number, etc.) to link my bank account, but that ended up not sticking and I had to spend the requisite 52 minutes on hold after the brokerage account was activated to call in and get an agent to tell me how to do it.

In case this helps anyone else skip the part where you sit on hold for an hour, I had to send an email to directbrokerage@nbc.ca with the subject “For Banking Indexation”, with my name, phone number, account #, and a void cheque image attached. For Tangerine if you don’t have physical cheques, they have a button on your chequing account to press where you’ll get a PDF of a void cheque for just this sort of purpose. This is one spot where Questrade has a bit of an edge, with their ability to self-serve some of these tasks. They did manage to link my chequing account just 4 days after that email, though, which was nice.

And just like other brokerages, you have to go through the tedious process of agreeing to all the individual exchanges’ agreements, re-type your name and occupation and all that for the Americans, etc.

One other thing to watch for is your login number: this is different from your account number, and they will only flash it at you once when you go to activate your account. Miss it and you won’t be able to log in!

Inconsistencies: As relatively smooth and quick as things went (I suppose being under the hour mark for a brokerage is fast for hold times these days), the whole process had more inconsistencies than I’d like to see in a financial institution acting as the custodian of my investments — NBDB could really use a little bit of a clean-up and alignment of their processes for that final bit of polish.

My biggest peeve is that we are training people to use the top-level domain (TLD) as a quick verification of identify for security purposes. If you’re expecting to deal with NBDB.ca, but the address bar says something different, you may be getting phished. National Bank has an identity crisis, using multiple names for themselves and multiple TLDs. So far in just one trade and the account set-up process, I’ve been directed to and have received emails from:
nbdb.ca
nbc.ca
bnc.ca
And also visited nationalbank.com once and linked them in my bank account as Banque Nationale.

Please, pick one TLD and name for yourselves. Or at least the English or French versions for respective audiences: when I’m trying to go to NBDB, NBDB.ca makes sense. NBC (National Bank of Canada) I can parse out too, though it’s not as intuitive (the American television network comes to mind first for what this domain could be), but bnc.ca doesn’t ring any bells in English.

There were also several inconsistencies in the email instructions they would send. For example, to log in for the first time, they tell you to go to a certain page and “click on Client centre” but the button is actually “Sign in”. It’s not hard to figure out what to do, but the instructions don’t quite match what you actually have to do.

Then to link my chequing account, the email helpfully told me to call in and which two menu options to press after calling in. I really like that little touch — those phone trees can be havoc to navigate, so it’s really handy to know that I press 4 – 1 to get to where I need to go. Except they were the wrong instructions and I had to get transferred anyway!

Summary: It’s a brokerage account. The sign-up process was refreshingly automated and fast for a Canadian financial institution, and best of all at no point did I have to mail anything or visit a branch. Trades are commission-free, and the interface is perfectly serviceable. I do wish they’d settle on one domain name though.

TLDR: The Rule of 30: A Better Way to Save for Retirement is focused on a singular question: “how much should I save for retirement?” This one is central to personal finance, and worth some discussion. Vettesse approaches it in a neat way, looking for how to smooth your consumption over your lifetime. I love that this book exists and takes this seemingly simple question seriously. However, I have some quibbles with the titular rule of thumb, largely because it doesn’t work for my particular situation, and he didn’t lay out any guidelines for when the rule breaks (not even “if you’re a sentient tuber, this rule may not be for you”). The discussion to get to the rule-of-thumb and some of the considerations are good and important to read, but I didn’t personally care for the book’s narrative format.

I don’t like finance books that try to teach personal finance things through a narrative, it’s just a pet peeve. I know, the Wealthy Barber is one of the most successful books ever, but not everyone writes as well as Dave Chilton. Well, it’s not just a pet peeve, it really doesn’t work in some ways. I felt that way with The Rule of 30: A Better Way to Save for Retirement — there was a lot to like with the book, but the filler really detracted from the experience.

“You mean we won’t be finishing today?” asked Megan, looking a little disappointed.
“I’m afraid this process we’ve embarked on will take a while, if you want to do it right. This seems as good a place to break as any.”
“Of course,” Megan responded, “but you should know we’re not going to be able to sleep until we know what happens with our $2.7 million. Are you free tomorrow?”
“I think so,” Jim replied. “I’ll check my calendar at home and text you with a time. Next time we’ll meet a my place…”

This is not a rich and engrossing story that happens to also teach a lesson, it’s a narrative device that makes the book about 3 times as long as it needed to be.

“But Potato, the book is only 190 pages long as it is. How else am I supposed to pad it out?” Fred Jim asked the freelance substantive editor and subject-matter expert in an email.
“Jim, I don’t know what to tell you. To say that the characters are one-dimensional is to besmirch the character development of lines,” Potato said, sharing a harsh but necessary truth. “The book requires significant re-writes before it will be engaging. Plus you don’t spend nearly as much time as you could discussing the titular rule itself, or it’s shortcomings.”
Jim, the findependent former actuary, thought about that for a bit. It was a bitter pill to swallow, but it was an important lesson from an independent voice in the field — and not something his publisher’s copyeditor was telling him.
The next day, he invited Potato over to discuss it more. He started setting up lawn chairs in the back yard for a discussion, oblivious to the frigid December air. “Potato, I’ve given a lot of thought about what you said about my book needing to be padded out.” He waved a new manuscript in front of his face. “What if we add a bunch of unnecessary actions and establishing text too?”
“You’re not hearing me, that’s slowing the reading down without making it more interesting,” Potato said, direct and to the point. “If the characters are just saying the things you want the book the say, there’s not much point in having the characters there.”
“Hmm, you’ve given me a lot to think about here, my good Doctor Spud. May I call you Stormageddon, Editor Extraordinaire?” Jim said, gathering his lawnchairs back up.
“Please don’t, that’s just a cheap callback to a previous post. I do have one final piece of advice for you before you go: read the dialogue out loud and see how it sounds. Does it flow naturally like human speech, or are you just throwing quotation marks around an essay?”
The next day, Jim knocked on Potato’s door at the crack of noon. Potato stumbled out of bed to get the door, threw on an N95, and answered the door otherwise in his PJs. “What?!” he demanded.
“I did that thing you suggested and read the dialogue out loud. It sounded exactly like how three actuaries talk to each other,” Jim proudly announced.
“Only one of the characters is an actuary, though.” Potato pointed out, rubbing his forehead. “The other two are supposed to be normies.”
“The dialogue is fine,” Jim insisted. “Just fine.”
“Ok, well how long did each scene, which was supposedly stretching on so long that the characters had to break to pick the discussion up later, seem to take?”
“Exactly two minutes,” Jim proudly stated.
“Yes, it’s like they’re talking between commercial breaks while watching old-school TV. People have Netflix now, Jim, and anyway, there was never a TV on in the background.”
“My media manager says I have to convey information in two minute chunks so I can be invited back on BNN or get a YouTube channel,” Jim said.
“But this is a book.” Potato flatly stated.
“Yes. And it needs to be about 200 pages to get published.” After a moment he added, “Plus I added one part where they’re watching Jeopardy so it could be a commercial break.”
Potato sighed. “Look, Jim, if you’re committed to this narrative device of having the characters talk out all the financial information you’re trying to convey to your readers, just take one more stab at making this interesting and readable, and we can move on to copy-editing. Have the characters say or do something interesting, or introduce a few more to see how your Rule of 30 works for people in different situations and life stages. I know you can do this!”
Three weeks later, Potato saw that he had a new email from Jim. Subject: I TOOK YOUR ADVICE AND NOW THERE ARE MORE CHARACTERS AND ALSO AN ORGY SCENE
Potato hit reply: “Jim, let’s revert to the previous version of the document and proceed with copyediting. It’s fine. It’s just fine as it was.”
Jim replied immediately: “Thanks so much Potato, your advice helped shape the book for the better for sure. Now I’ll give you some: don’t be so critical in your book reviews. You’re not working as an editor for the author, you’re just giving your thoughts to people at large, and if people think you’re an asshole they’ll be less likely to be nice to your book.”
Potato replied back: “Speaking of which, there was a perfect moment to plug The Value of Simple when the couple needed to know how to invest to capture those returns your actuary character was projecting for them. Why didn’t you?”
Jim’s final reply was BITFD material: “I really want to, it’s truly an excellent guide for the do-it-yourself investor. Really every young Canadian should pick it up, if only so that they know what they’re paying their advisors to do. But my hands are tied here, I’m working with ECW Press and we can’t go slipping in a mention to other books, especially not a self-published work. It’s like that whole conversation about government pensions. My hands are tied, here… Plus if we remind people that other books exist, there’s a danger they might put this one down before they get to the good stuff.”

Ok, I hope that vignette thoroughly demonstrated my point that I did not care for the framework story and how much the extra description slowed down getting to the point, and how very little happened before they had to break and start with a new scene. Plus I can’t imagine anyone will want to go and hire a planner if it takes four months of nearly weekly sessions just to be able to answer the first question in creating a financial plan.

So what about The Rule of 30 itself?

The book is centred on an important topic: how much should you save? From there, it takes off into a discussion of what shape your savings should take: should you aim to save a set percentage of your income for retirement from the time you start work, or should you aim to save more later — you’ll have less time for the magic of compounding to work, but it will be easier to save a higher portion of your income once the costs of childcare and a mortgage are through with.

Fred makes an important point in Chapter 5: “You want your spendable income to be at a tolerable level in all years and to be rising over time in real terms. In fact, I would argue that this should be the second-most important saving goal.” This is in the context of showing that after having kids, or upsizing a house or facing an increase in interest rates on a mortgage, the amount of income available to spend may decrease.

The way to achieve that is the titular “rule of 30”: have the sum of your mortgage, daycare (and other temporary unavoidable costs), and retirement savings be 30% of your income. So when you have high daycare and mortgage expenses, you save less. When your income is higher and your daycare days are behind you, you save much more, ending off with saving 30% of your income in the last few years when your mortgage is paid off.

It’s a neat idea, but I don’t love it. Partly because my own life immediately shows aspects where it doesn’t work. Chapter 7 is on “stress-testing the rule of 30” and mentions some of these factors but doesn’t actually address them to my satisfaction.

What if you get knocked out of the workforce (or off your career trajectory) early, say by untimely disease or caregiving duties? Isn’t back-loading almost all of your retirement savings incredibly reckless? Fred mentions this problem, but just leaves it as a problem: “What I see as a bigger problem is if you are forced to retire much earlier than planned. As with everything else in life, one’s retirement plans do not always pan out. Unplanned early retirement represents one of the biggest challenges to saving for retirement. This is true no matter what rule you follow to save, but it may be a bigger problem with the Rule of 30, since that rule tends to backload your retirement saving.”

What if you’re a renter? Fred suggests that you just use rent in place of the mortgage and carry on. But as housing bulls are so fond of pointing out, rent doesn’t end, so you can’t make the same assumptions about the ability to back-load savings.

What if you live in an expensive city and rent or mortgage is more than 30% of your income? That’s the case for us, and many renters in Toronto pay more than 50% of their salaries on rent. “I can sympathize, but ultimately it means that saving adequately for retirement is going to become more of a challenge.” Yes, and the “rule of 30” will break, but he doesn’t give us a guideline where the rule may or may not apply. I would have preferred some rails on that: e.g., the rule of 30 works great for couples who buy their house by the age of 33 and whose mortgage starts at 33% or less of their pre-tax income, and who will work into their 60’s without getting sick or fired along the way. So anyone living in Toronto or Vancouver should not buy this book, nor anyone who does not have a crystal ball to see the future (or at least who doesn’t have a rock-solid disability insurance policy), nor anyone interested in early retirement.

The last factor that he doesn’t mention influencing the rule of 30 is inflation. Much of the rule of 30 depends on hand-waving wage inflation: your mortgage will be less, or your rent will be less in the future, because your wages will increase faster than your costs, giving you the ability to save more at that time. However, for many in the public service (or other situations) wage inflation running ahead of cost inflation (especially housing cost inflation) is not a given. Here are the salary inflation adjustments for the last 5 years as compared to CPI for an Ontario non-union public-sector employee chosen completely at random out of the sample of convenience we have here at BbtP:
2017: 3%, CPI: 2.1%
2018: 0.86% CPI: 1.7%
2019: 1.6% CPI: 2.2%
2020: 2% CPI: 1%
2021: 2% CPI: 4.7%

Our poor public sector idiots have fallen behind inflation by a cumulative 2.1 percentage points. Ok, but Vettesse wasn’t just talking regular raises that attempt to pace inflation, he also included getting promoted as part of the increased earnings. What if you include that? Including all merit bonuses and seniority promotions for an Ontario public sector employee with consistent top-quartile performance reviews only gets ahead of inflation by a whopping 0.9 percentage points after 5 years — some progress, but not enough to handwave away the assumption that back-loading retirement savings would work out, especially if your mortgage or rent payments are high (he appears to be assuming real gains of 6%/yr in earnings, based on the numbers in figure 7, a figure that I find unfathomable from the flat-as-a-pancake organization I sit in).

Wayfare also works for not-for-profits, and her wage increases (nominal) over the last five years have been:
0%
0%
0%
0%
0%

So you see my problem with the underlying assumptions of the Rule of 30. Yes, Wayfare in particular is perhaps a rare edge case, but I just don’t think the approach to back-loading your retirement savings to the degree the rule of 30 suggests is prudent enough. I don’t think we can safely assume that wage growth will show up as a general feature to make saving easier later, and I don’t think the rule applies as broadly as Vettesse makes it out to be in the stress-testing chapter — at the very least there are not enough warnings or discussions on when it will fail you.

Anyway, my main two issues with The Rule of 30 are that I didn’t care for the narrative framing padding the page count, and that the rule itself didn’t apply to me for at least 3 different reasons.

Beyond that, which is me nit-picking, it was a good book. This is an important question. A vital one: “How much should I save for retirement?” is central to personal finance. And the discussion to get to the rule-of-thumb and some of the considerations are good and important to read.

I like that there is a book that discusses how much you should save, and how much it is a surprisingly hard problem, and takes the whole thing rather seriously, including the trade-offs that saving entails. But I don’t love the replacement of one poor rule of thumb (save 10-15% or whatever) with another, slightly better rule of thumb (mortgage + daycare/some other exceptional costs + savings = 30%) where the limitations are not clearly laid out. I wish that the book had introduced more characters or scenarios to show how the rule works in different cases (rather than just handwaving that it’s robust), and more importantly, showed better where it doesn’t work.

At the very end, he presents an alternative formulation that fits the larger goals of smoothing spendable income over a lifetime that underlie the rule-of-30: “If I could express it differently, I would suggest saving 5 percent of your pay in your thirties, 15 percent in your 40s and 25 percent in your 50s. This alternative represents a rough approximation of the Rule of 30.” I like this alternative much better. Firstly, it sets a floor for saving, so you’re always saving something (even when it’s hard) — that removes the temptation to come up with “extraordinary” expenses that never get you to a point where they’re under 30% so there’s something left to save, and also helps get around the issues where high housing costs may take over 30% of your pay. Saving something early on also makes it more robust to getting kicked out of the workforce early.

Just unfortunate that “the 5/15/25 rule” is not quite as catchy as “the rule of 30”.

And a nice little touch: the book is printed with a two colour process. Really cool to see and props to the graphic designer who used the extra colour well in all the tables, graphs, and chapter titles. It made things pop just that little bit more (and was absolutely necessary for a few of those stacked bargraphs with 6 items).