Blessed by the Potato

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 its 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).

Questrade has released a new interface for their desktop/web trading platform. It looks like a bad compromise for mobile users, with only partial information displayed on several pages. For example, your positions now show either the number of shares and total value, or the share price. Three columns is not hard to fit on a screen, people…

In the trading screen, it is now a multi-step process: first choose limit order, then number of shares, then price, etc. This is a mixed bag. On the plus side, it forces your attention to one step at a time, which may help reduce mistakes. You can also click on “change balance display” to only display your cash available balance so you don’t get mixed up with what they’ll let you borrow on margin, rather than having multiple balances sitting there. The order entry also doesn’t default to entering the number of shares you currently have (as if every time you wanted to trade a position, you were looking to sell it all). The cons are that it takes longer to enter an order, and is annoying if there is any interplay between the number of shares you want and the price you want to enter: you may have to move back a step to adjust your quantity, then forward again to enter your new price. Another big con is that the order review does not display the ECN fees (note: this behaviour has also carried through to the legacy Edge setup). Instead, an ETF purchase order shows $0.00 commission, then an asterisk to some fine print that says ECN fees may apply.

If you want to go back to the way things were, you can add the old platform, called Questrade Edge, to your profile. In the top-left menu (while in Trade), click on All Platforms, then click on the Questrade Edge tab on the top, then finally the Add Questrade Edge button. When you go back to Trade, you’ll see the old (Edge) platform.

In other news, National Bank Discount Brokerage has taken their commissions to zero (and no ECN fees in the fine print that I can find). I haven’t had a chance to open an account myself yet to get a first-hand experience with it, but it’s compelling. However, I will note that the existing options (e.g., Questrade) were practically free, and even paying $9.99/trade at the other brokerages is not going to cause you to miss your financial goals. If you’re happy with your current brokerage, please don’t feel any pressure to switch. Plus there’s a decent chance that in the next year or two other brokers may follow suit. In the meantime, while the interface may be a bit different than the TD and Questrade examples detailed in the book and course, the general mechanics of placing a trade for an ETF (limit orders, ticker symbols, etc.) will still apply and I have faith that you will be able to figure it out if you choose to go with NBDB.

I have so much to say about the last crazy, lunatic, unprecedented year, and not sure how to say any of it — my own thoughts are still all muddled. Covid was just a part of that for me — we’re also coming up on a year since my dad died. I haven’t properly eulogized him, or told his story Speaker for the Dead style, and don’t know if I will ever be able to.

This may be a personal blog, but a big focus is on finances so let’s stick to that aspect. It’s easier to talk about, at any rate.

Doing taxes was painful this year, for lots of reasons. I had to prepare the final return for him, as well as a T3 return for the estate, which had quite the learning curve and lots of weird CRA idiosyncrasies. Some examples to delay us before getting to the meat of the post? Sure, why not. Let’s start with where to simply mail the form. It wasn’t a simple Ontario and East send it here, Manitoba and West, send it there — Ontario was spit up with some cities sending it to one tax centre, others to another. Why does that matter? It’s not on its own a complex thing to figure out, but it’s one more step of complexity in what was already a hard process, and one that most people only face under hard circumstances. And it seems like the sort of thing that makes no damned difference so why is the CRA making it needlessly harder? Oh, and there was also one page that got sent on its own to another tax centre in Quebec. Why? Who knows.

It was painful because it was the “final” return and well, that’s a reminder that he’s dead, that’s it. Things are final now, and there are feelings there.

But the other reason tax season was painful was that I had to go over all the financial losses from 2020 to report capital losses. For most people, 2020 wasn’t such a big deal, investing-wise — scary for a brief while, insanely bubbly in a few pockets of the market, but a buy-and-hold index investor ended the year in the positive. Not so for us.

I’ve said many times before that my dad was a good investor. He got me into investing at a young age, etc. etc. That was an understatement: he was a great investor. He didn’t want to be famous, but would give his head a little shake whenever someone else tried to proclaim themselves “Canada’s Warren Buffett”. He was Canada’s Warren Buffett, or at least it seemed that way for a long time.

But as Buffett said, a long string of impressive numbers multiplied by a single zero is still a zero. In the end my dad wasn’t Canada’s Warren Buffett: he was Canada’s Bill Miller or Hwang.

The problem was that he was so good for so long that he got over-confident. He was not afraid of leverage — indeed, he used a lot of it.

On an episode of Because Money (I can’t remember which one to link it now), I shared the tale of how he was in the hospital, sick from his cancer, and needed to check in on the market — because a drop of 5% would be enough to trigger a margin call.

We argued a lot about leverage after that.

I tried to tell him that he was taking too much risk — risk he didn’t even need to take. He tried to convince me that if I ever wanted to be rich, to do more than just get by on my public sector salary (which he also argued I could do much better if I just switched careers), I needed to use leverage.

So he gave me a two-part gift: the first was an amount of money, which here we’ll just call X, a large amount that was roughly a year’s salary for me. The second half of the gift was that he would manage it for me, including by using margin. When I was young he had taught me to invest, but he never really taught me how to invest, at least not like he did. Dad was not the teaching type — he had no patience for it. So this was a chance to finally pass along that knowledge, as I could see what he did in an account in my name almost in real time.

X went into a brokerage account, and he borrowed another 2.48X against it. All it would take would be a 28% market correction to completely wipe me out, which was terrifying. “Relax,” he said, “you need to get used to this. If I do lose you your money, I’ll just write you another cheque. But it won’t happen, and this is something you have to learn.”

Well, Covid-19 hit. I bought some puts on the S&P500 in the early days as a hedge — I briefly felt like a market genius when the virus escaped Wuhan and the market started to wake up to the risk. I sold those for a small profit as things got volatile and it reduced the margin a tad. But the market kept going down, violently. The overall markets were down about 30% by the end, but the highly concentrated active portfolio he was in was down even more, despite appearing more conservative. But all those staid dividend-payers suddenly looked like broken businesses in the wake of shutdowns, and the overall indexes were buoyed by tech stocks that we didn’t own. I threw more money from my savings at the account to try to stave off a margin call, but finally got margin called on March 22, and became a forced seller just a day before the bottom was in.

In the end, X became 0.1X — my inheritance was essentially gone. The market recovered over the rest of 2020, but I did not leverage back up, and even if I wanted to there are limits to how much I could have added.

That’s the real danger of leverage: even if you have the psychological risk tolerance to ride out a volatile period in the market, a big enough dip can cause a permanent loss of capital as you’re forced to sell at the bottom to cover the loan. I should perhaps interject that while that non-registered account was actively managed, I do have registered accounts that are invested in passive index funds, which fared much better though the market crash and recovery, and which is my general recommendation for people — obviously active investing entails various risks, doing so with leverage even moreso.

The story sadly doesn’t have a silver lining, as I also didn’t learn much about his style of active investing — the cancer made him tired, and a little extra motivation to teach didn’t magically imbue him with the patience for it. “So tell me son, why did I do that trade?”
“I don’t know.”
“Well if you’re too fucking stupid to see it then I guess this family is doomed.”
“Thanks, Dad.”

He wanted to spend what little energy he had left on trading, not teaching.

In addition to learning a lot about leverage — or rather, strongly reinforcing my previous view — I also got an object lesson in risk correlation. Because part of this whole experiment was a compromise that stemmed from those arguments on leverage: I would have an account with more leverage to get used to it and see first-hand its power, and he would in turn take down the level of leverage on his own portfolio. Because even setting aside how nuts it was to run so close to the red-line that a 5% correction would make you start blocking the margin clerk’s number in good times, it was not good times. He had by that point had several run-ins with the hospital system for his cancer, and many more days where he didn’t want to get out of bed to trade. So he agreed that he was going to reduce his own leverage, begrudgingly. But “reduce” didn’t mean “eliminate,” and he too was margin called, almost every damned day through March, 2020.

The ability of an insurer to pay out insurance that was also tied to that very risk — risk correlation is not a good scene. So very understandably, Dad had to renege on his promise to insulate me from losses related to the leverage. In hindsight that was a completely obvious outcome, but it somehow never occurred to me when I let him go nuts with margin loans in my account.

That whole year was crazy in so many ways, and I want to try to be clear (I know I’m not, but I’ll try) that the human losses were the real tragedy… but those are hard to talk about, and this is in many ways a personal finance blog, and there are financial aspects to talk about.

Another aspect of the whole affair was a huge whipsaw in my own financial planning.

Back before we found out my Dad had cancer, before we found out it had returned and spread, before we knew that it was terminal, we did a Because Money episode on expecting vs *expecting* an inheritance. Basically, I never factored in receiving an inheritance into my own financial plans, at least not in a major way. My parents were definitely better-off than I was, so my standard-of-living in part is facilitated by gifts from them. While they don’t pay my rent or anything quite that co-dependent, a lot of my luxuries have come from gifts: plane tickets for vacations, curling equipment, or new video game systems. A good portion of my clothes I didn’t buy myself. So of course I was leaning on them in some ways (hashtag privilege?) but I also wasn’t factoring an inheritance into my long-term plans.

Suddenly that was changing. I was getting a rather large gift up front, and dad was dying — the prospect of an inheritance was becoming very real and updating my planning to take it into account seemed like the next step. In-between arguments over leverage and trading strategies, we also argued about frugality. I’m a pretty frugal person by nature, and over 8 years of grad school only reinforced that. I save a decent portion of my earnings, and have nearly zero affinity for conspicuous consumption. Dad tried to convince me to spend more, and live more in the moment. He didn’t want me to save that gift for the future — he wanted to grow it briefly, then have me plan to spend the dividends on the extra gas and insurance for a new showy gas guzzler to replace my Prius. He wanted me to spend 100% of my income — I already had enough saved up for the first few years of retirement, and I could count on an inheritance after that.

I wasn’t willing to go that far (I mean, I love my Prius), but hey, I can get greedy too. I was off work to take care of him, but was already imagining what it would be like to spend a few extra thousand per year once I had a paycheque again. I had started *expecting* an inheritance.

Then Covid hit and we got to be on a first-name basis with the margin clerk and it all went to hell. Whipsaw: back to planning to save the normal way.

Just a quick note that Nest Wealth has changed their fees. There are now 4 flat-rate tiers (vs. 3 before). At the low end, this makes them a little more cost competitive. At the high end though, they lose their cost dominance until a much higher portfolio size — from roughly a quarter of a million to roughly half a million now.

And of course there may be reasons you prefer one firm over another even if the costs are a bit higher one way or the other.

I’ve been quite unimpressed with the big banks’ phone systems during the pandemic. Not just the long wait times (nearly two hours the other night with TDDI) which is somewhat expected (it was regularly 45+ minutes in the before-times, and more has to be done remotely these days), but their schedule-a-call services have been particularly disappointing.

My first attempt at a scheduled call was with RBC… who completely ghosted me at the appointed time. That was set up in the first place because the regular phone staff couldn’t answer an estate question after the first hour-on-hold wait. I gave up on trying to resolve it remotely at all, and sat on the issue for a few months until I could deal with it in-branch.

When I went to set up a new youth account for Blueberry, TD wouldn’t let me do it self-serve online — it required an appointment. Fortunately they offered the option of a phone appointment so I could avoid an unnecessary trip out of the house (and the accompanying covid exposure). Which was my second experience with a scheduled call. They did call on time… only to tell me they couldn’t open a youth account over the phone and I had to go into the branch. Someone should tell the web team so the website scheduling the calls doesn’t waste everyone’s time — I got to the schedule a call in the first place from choosing to open a youth account within the website. And while some banking services are essential, I wasn’t going to worry that much about setting up an account for Blueberry that I’d go out to do it during a stay-at-home order.

Anyway, Blueberry now has her very first bank account at Tangerine, which we were able to set up completely online — I didn’t even need to call! How is this still so hard for the big banks?