Posted on April 10, 2019 in Personal Tax Tax Planning


Preparing for retirement can be a very stressful experience, with so many factors that you need to consider. How much money will I need to maintain my standard of living? How much will I want to travel? How long will I live? What if I outlive my money?

There’s so much uncertainty, that financial rules of thumb for planning your retirement have become very popular and  following them relieves at least some of that uncertainty. It is important to understand the assumptions, and the limitations of these guidelines,so that you understand whether they are relevant for your particular situation. 


This popular guideline incorporates the fact that you will not have certain expenses in retirement that you had while employed, like commuting costs and buying clothes for work. You also won’t be saving for retirement anymore. However, there are some personal factors that can make this more of a myth than a guideline, including:

  • whether you own your home and your mortgage is paid off
  • whether your children are financially independent or you are still helping fund their university education
  • your own personal goals for retirement – your personal income replacement factor could be significantly lower, or higher, than 70%

A better way to estimate how much retirement income you will need is to track your current expenses and then adjust for the changes in your lifestyle once you retire, such as an increased budget for vacations and hobbies. There are tools and apps that you can use to help you categorize and summarize your current spending. However, check with your bank first, as using third-party tools that automatically download transactions from your bank accounts may violate your online banking agreement and expose you to liability if there are unauthorized transactions in your accounts. Many banks provide their own tools to help you manage your finances, or you can download the transactions and use spreadsheet software to create your own summary.

Once you have your recurring annual budget amount, adjusted for lifestyle changes, you should also budget for expenditures that do not occur annually, such as purchasing a new car or major house renovations. If, for example, you plan on purchasing a new car every eight years, you should factor in an annual “car replacement fund” over that period to give you a more comprehensive budget amount. Similarly, you should budget a certain annual amount as a fund for major home repairs – you might not need that money in every year,  but planning for bathroom and kitchen renovations, new furnaces and roofs should still be built into your retirement budget, so that they don’t end up being a nasty surprise when they happen! Budgeting a percentage of the purchase price of your home, or a specific dollar amount per square foot, are common ways to do this. As with all rules of thumb, these should be adjusted for the age of your home and how often you want to renovate it.


One of the most commonly-cited rules for estimating how much income you can withdraw from your investment portfolio without risking running out of money is “the 4% rule.” This rule comes from a study conducted by William Bengen and first published in The Journal of Financial Planning in 1994.

Bengen explored the concept of “portfolio longevity” – how long your investment portfolio would last if you withdrew a specific percentage of it in the first year of retirement – and then adjusted that amount for inflation in each successive year. He tested this against the stock market returns for a person retiring in each year from 1926 to 1976, and for initial withdrawal rates from 1% to 8%. With an initial withdrawal rate of 4% the portfolio lasted more than 33 years – even for those worst-case scenarios of retirees who lived through the Great Depression or the 1973–74 recession. 

The rule provides a simple answer to how much you need to save for retirement or how much retirement income you can take from an investment portfolio, but there are some important assumptions behind this rule. His sample portfolio in the data above was 50% invested in U.S. common stocks and the remaining 50% invested in intermediate-term Treasury Bills, and it was rebalanced annually. That may be more risk than some retirees are willing to assume. 

Bengen did explore this issue in his study, comparing the returns from various portfolio mixes of stocks and fixed income assets. While the 50/50 split seemed to be optimal in terms of maximizing the longevity of the portfolio, increasing equity portion of the portfolio to 75% increased the value of the estate passed on to the heirs, while having minimal impact on the portfolio longevity. 

Bengen updated the study in 2006 and concluded that 4.5% was the safe initial withdrawal rate. Whether it is 4% or 4.5%, this can give you a good guideline for how much you will need to have saved by retirement to feel confident that you will not run out of money. Once you have calculated your budget based on the retirement lifestyle that you want, and subtracted what you expect to receive from the Canada Pension Plan, Old Age Security and any defined benefit pension plan, you can divide that net amount by 4% and have a reasonable target for your portfolio at retirement. 


You often hear that our tolerance for risk in our investment portfolios should decrease as we get older, theoretically since you will have less time for your portfolio to recover from a financial catastrophe, which is where the “100 minus your age” rule comes in to play – the proportion of your investments invested in equities should be 100 minus your age, with the remainder invested in safe, fixed income assets, such as bonds. So a 40 year old should have 60% of their portfolio invested in equities, while a 70 year old should have a portfolio with only 30% equities.

However, with the increase in life expectancy since this rule was introduced, and with the historically low returns on fixed income investments, retirees will risk running out of money by following this rule. Some advisors have adjusted the rule to “110 minus your age” or even “120 minus your age” to address the increase in life expectancy, while another study  evaluated the minimum and maximum returns for various portfolio mixes against the “100 minus your age” portfolio over a 50-year period. This research found that the “100 minus your age” portfolio consistently underperformed against both the minimum and maximum returns for two constant mix portfolios: 60% equity / 40% bonds and 70% equity / 30% bonds. This is consistent with Bengen’s conclusions. While every individual’s tolerance for risk is very personal, the link between that risk and the expected return on the portfolio is very clear.

In summary, these common guidelines can be a good starting point for thinking about your retirement, and how prepared you are for it, but each situation is unique and therefore understanding the assumptions and limitations of the guidelines is important.

**This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice. 

***This article was originally published in Volume 33, Issue 2 of Business Matters in April 2019. BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use. BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members. Susan Cox, CPA, CA – Author.