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
Mortgage:                      20,000
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!