How Actuaries Come Up With The 50% Rule
Many people are surprised when they are told that they can have the same standard of living in retirement as their working years with only 50% of their working years income.
Thankfully, actuaries have researched the spending habits of working age and retired Canadians. I’d like to provide you some evidence of their 50% rule conclusions to help convince you of its accuracy.
First, we will look at the assumptions (taken from Fred Vettese’s The Real Retirement) made when coming up with the 50% rule.
Assumption#1: Married couple with 2 children who own their own home.
Assumption#2: Mortgage costs are averaged over a 30 year period. Child raising costs are averaged over 35 years.
Assumption#3: Income tax, Canada Pension Plan contributions and Employment Insurance contributions are 23% of gross income.
Let’s look at the family making $110,000 per year.
Gross Pay: $110,000
Taxes, CPP, EI: 25,000
Child raising costs: 13,000
Savings (6%) 6,600
Remaining $45,400 or 41% of Gross Pay
What does this mean? Only 41% of your gross pay is available to you for regular consumption when you are paying off your mortgage, raising your children and saving for retirement. 59% of your income goes to fixed costs that will eventually disappear. If you managed to live for 35 years with only 41% of your gross income, think how wonderful you’ll feel living on 50% of your income in retirement!
I’m a department head for a high school in Toronto. I graduated from the Ivey School of Business at Western University and have been a DIY investor for over 20 years.