Start from spending, not salary
Your retirement number should be based on what you'll actually spend, not a percentage of your working income. Many expenses disappear in retirement while others may increase.
Expenses That Often Decrease
- • Mortgage payments (if paid off)
- • Commuting and work-related costs
- • Retirement account contributions
- • Life insurance premiums (term policies)
- • Professional clothing and dry cleaning
- • Children's expenses (if independent)
Expenses That May Increase
- • Healthcare and long-term care
- • Travel and leisure activities
- • Home maintenance (more time at home)
- • Prescription medications
- • Property taxes and inflation
- • Utilities (home more often)
The retirement number formula
Simple Formula
Step 1: Annual Spending
Calculate your expected after-tax spending in today's dollars
Step 2: Guaranteed Income
Subtract CPP/Social Security and any pension income
Step 3: Apply Safe Withdrawal Rate
Divide the gap by 3.5-4.0% to find your portfolio needs
Worked example
Real-World Calculation
Current Expenses
- • Housing: $2,500/month
- • Food & dining: $800/month
- • Transportation: $600/month
- • Healthcare: $400/month
- • Entertainment: $500/month
- • Other: $700/month
Total: $5,500/month = $66,000/year
Retirement Adjustments
- • Mortgage eliminated: -$1,800
- • Reduced transportation: -$300
- • Increased healthcare: +$200
- • Increased travel: +$400
- • Property taxes/maintenance: +$300
Adjusted: $4,300/month = $51,600/year
Annual Spending Need: $90,000 (includes taxes, rounded up for safety)
Guaranteed Income: CPP $15,000 + OAS $7,000 + Company Pension $13,000 = $35,000
Portfolio Gap: $90,000 - $35,000 = $55,000
Safe Withdrawal Rate: 3.75%
Retirement Number: $55,000 ÷ 0.0375 = $1,467,000
Safe withdrawal rates explained
| Withdrawal Rate | Historical Success | Best For | Risk Level |
|---|---|---|---|
| 3.25% | ~100% (30 years) | Very conservative, early retirement | Very Low |
| 3.5% | ~98% (30 years) | Conservative, flexible spending | Low |
| 4.0% | ~95% (30 years) | Traditional rule, balanced approach | Moderate |
| 4.5% | ~85% (30 years) | Higher income needs, some risk | High |
Regional income sources
🇺🇸 United States
Social Security
Average $1,800/month, maximum ~$4,200/month at full retirement age
Medicare considerations
Part B premiums, Medigap, out-of-pocket costs can be $3,000-8,000/year
Tax implications
Up to 85% of Social Security taxable depending on total income
🇨🇦 Canada
CPP (Canada Pension Plan)
Maximum ~$1,300/month at age 65, can start as early as 60
OAS (Old Age Security)
~$700/month, claws back at higher incomes ($86,912+ in 2024)
GIS (Guaranteed Income Supplement)
Low-income seniors, income-tested, up to ~$1,000/month
Stress-testing your number
Model different withdrawal rates
Test 3.25%, 3.5%, 3.75%, and 4.0% to see the range of outcomes
Add longevity buffer
Plan for 90-95 years old, not just life expectancy (80-85)
Factor in major one-time expenses
New roof, car replacement, children's weddings, long-term care
Consider sequence of returns risk
Bad markets in early retirement can permanently impair your plan
⚠️ Common Mistakes
- • Using salary replacement ratios: "80% of income" ignores actual spending needs
- • Ignoring taxes on withdrawals: Traditional accounts create taxable income
- • Forgetting inflation: $50,000 today ≠ $50,000 in 20 years
- • Not updating annually: Life changes, markets move, plans need adjustment
- • Including home equity unrealistically: Only count it if you'll downsize or borrow
Dynamic withdrawal strategies
Guardrails Method
Start with base rate
Begin with 3.5-4.0% withdrawal rate
Set guardrails
If portfolio drops 10% below target: reduce spending 10%
If portfolio rises 20% above target: increase spending 10%
Review annually
Adjust withdrawal amounts based on portfolio performance
💡 Pro Tips
- • Delay CPP/Social Security: Each year of delay increases monthly benefits
- • Model multiple scenarios: Best case, worst case, and most likely
- • Consider part-time work: Even small income reduces portfolio pressure
- • Build in flexibility: Can you reduce spending 20% if needed?
Frequently Asked Questions
Do I include my home in my retirement number?
Only if you plan to downsize or use a reverse mortgage. Otherwise, treat your home as consumption, not an investment asset. Your retirement number should cover all non-housing expenses.
What about TFSAs/Roth accounts in the calculation?
Include them in your total retirement assets. They reduce future tax obligations since withdrawals are tax-free, but they still count toward your portfolio total for the withdrawal rate calculation.
How often should I recalculate my retirement number?
Review annually, or when major life changes occur (job loss, inheritance, health issues, divorce). Market volatility alone shouldn't trigger constant recalculations, but significant changes in expenses or income should.
Is a 4% withdrawal rate still safe?
The traditional 4% rule assumes a 30-year retirement with 50/50 stocks/bonds. Current low bond yields suggest 3.5-3.75% may be safer, especially for early retirees or those with inflexible spending needs.