My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 3, 2014

How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does! - Part 1

Let’s be honest. No one knows how much money they really need to retire. My own attempt to quantify my “retirement number” results in a range of hundreds of thousands of dollars. Unless you fancy yourself a two-headed economist/soothsayer, you can only plan based on historical investment returns, anticipated spending requirements and assumed inflation rates. That does not even account for wild cards such as your longevity and the random sequence of returns you will get from the stock market. The best laid retirement plans of mice and men can often go awry… when bam -- you get a sudden economic shock or stock market aberration and your retirement plan becomes as worthless as the paper you wrote it on (those of a cynical nature have be known to say; all any retirement plan proves is ink sticks to paper).

I’ve been pondering this question for over a year as I have attempted to figure out the nest egg I need to fund my own retirement. My final conclusion: the financial and economic variables you need to consider to even attempt to answer this question are staggering (I detail these in Part 5 of this series) and I will never come to a definitive answer. This realization is actually liberating yet frightening. Liberating as I realize the best I can do is to create a plan that is based on a framework of historical data, actual data and my best guess estimates. Frightful in the sense that I may not know until it’s too late if I have grievously miscalculated my retirement needs. While going through this nest egg building process, I made some notes and read various papers. I soon realized I had a blog post in the making; in fact a six- part series that I will post throughout February.

For some, this series may be far to detailed. For others, these posts will provide food for thought. For the mathematicians and academics out there, the discussion will not be “academic” enough (although the problem with many academic papers is that only the author and other retirement/mathematical experts understand what the heck they are proposing). However, in all cases, despite the difficulty I see in making a definitive determination of how much money you or I need to retire, burying your head in the sand and ignoring the issue is not an option. It is imperative you try and at least get a ballpark number for planning purposes and continuously refine that number over time. I hope this series of blog posts will provide you the impetus to plan for your own retirement if you have not yet done so.

So where does one start? The 4% withdrawal rule is one of the most commonly accepted rule of thumb retirement strategies. Simply put, the rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30-35 years.
If you embrace this rule of thumb, then in theory you should be able to determine how much money you need at retirement by working backwards. Unfortunately, as I will discuss, it is not quite that simple. The 4% withdrawal rule has some inherent flaws which I discuss below and therefore should only be used as part of your retirement framework to provide you an idea of what would be a sustainable nest egg.

Whether the withdrawal percentage is reduced from 4% to 2%, or you modify the formula, everyone is still searching for the holy grail of retirement planning, that being, what is your safe withdrawal rate? I.e.: How much money can you safely withdraw from your nest egg each year and not run out of money before you pass away.

Some retirement experts feel the search for a safe constant withdrawal rate is a foolhardy. In this Toronto Star article, Moshe A. Milevsky, a well-respected finance professor at the Schulich School of Business at York University says the following:

“If the rule means that you start by withdrawing 4 per cent of the value of the portfolio at retirement — and then adjust that by inflation every year regardless of how markets perform over time, then it is a horrible rule of thumb. The spending rate over time should depend on the markets, interest rates, how your portfolio is performing and your attitude to longevity risk. You cannot pick a rule at the age of 65 [and say] that is how you will behave over the next 30 years.”

Mr. Milevsky has some very interesting original thoughts on retirement that I discuss in the third part of this series. In fact, if you agree with his views, I tell you to exit the series at that point and return for Parts 5 & 6. Notwithstanding his comments (which I believe have validity), because of the simplicity of the calculation, many people and Financial Institutions still feel the 4% rule is an excellent starting point in the determination of your retirement nest egg if you understand its limitations and flaws. I agree that this rule is simple to apply and understand and thus over the next few posts, I will discuss various studies and papers that deal with the determination of a safe withdrawal rate and whether 4% is a safe withdrawal rate in this day and age. Finally, I will discuss variations of the rule put forth by retirement experts to adjust/correct for the perceived/flaws of the rule of thumb.

Limitations of the 4% Rule

Some of the criticisms of the 4% model include:

1. The model does not account for income taxes on non-registered accounts and registered accounts. Michael Nairne in this National Post article descriptively calls the deferred tax liability on registered accounts
the “Dark Side” of RRSP’s.

2. The model does not account for transaction fees or management fees related to your investments.

3. The model treats everyone exactly the same.

4. The data for the model was based on only historical U.S.stock data and does not include foreign equity data.

5. The model builds in an inflation adjustment; however, some commentators feel the cumulative inflation adjustment may force you to take larger and larger withdrawals.

A Tax Centric Variation on the 4% Withdrawal Rule

As result of the omissions above, especially the income tax component, I created a very crude tax centric variation of the 4% rule to provide an alternative comparison to some of the other retirement formulas I discuss in Part 6. (Please note I said crude and tax centric. When I posted last Monday I was going to run this series, I got various comments on the blog and to my inbox that people were excited to see what I came up with and did I use a Monte Carlo simulation etc. I do not have the qualifications, let alone the time, to run statistical simulations to come up with a unique formula that like every other formula will be flawed because of the unquantifiable variables that must be considered in determining your retirement number).

Now that I have dampened your expectations for my crude variation, I simply determined my spending requirements in retirement and subtracted from my spending requirement, my estimated sources of income outside of retirement (Old Age Security, CPP etc.) which results in a retirement withdrawal shortfall.

Here is where my calculation gets tax centric. I first calculate the income tax owing on my total estimated retirement income. This tax liability causes my retirement shortfall to increase. The next calculation is a bit circular, but I then come up with a revised withdrawal amount that after-tax covers my anticipated spending shortfall.

I then divide my required retirement after tax withdrawal above by 4% (3% for a conservative approach) which tells me how much money outside of any CPP, OAS or company pension (which I don’t have) I need to accumulate for retirement. When I post actual numbers in part 6 this will be much easier to follow and make a little more sense.

This crude estimate will give mathematicians heart palpitations. I know this tax centric variation does not address multiple issues, but bear with me until you see where I go with this in Part 6.

In no way should you rely on this framework as the sole determinant for your own retirement planning. However, as you will see in my last blog post, this number is not that far off from what I get when I have a financial planner use his software to provide me with “a number” and the number I get when I compare to some other calculations suggested by retirement experts.

I feel like a Lawyer with all these Caveats

One last final caveat before I discuss some data and analysis. Please be aware that I am not a retirement expert, financial planner, mathematician (I dropped statistics in University), or a psychic and understand this series should not be construed as specific personal retirement planning advice. The intention of this series is to:
  • summarize prior research (the information is overwhelming and the arguments made by some brilliant people, hard to disprove)
  •  assist you in determining your safe withdrawal rate percentage or provide you with an alternative method to the constant withdrawal methodology
  •  provide links to the articles I read
  •  share my thought processes in trying to determine my own retirement needs
Hopefully all this will provide you with a launching point to help you consider what may be a reasonable retirement nest egg and/or a reasonable spending amount for your retirement.

On Wednesday I discuss the history of the 4% withdrawal rate rule of thumb in greater detail.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. It's easy to criticize any attempt to determine a "retirement magic number". If we just stick to the big issues, I think fees are a huge problem for the 4% rule as I explained here:

    You can't give away 2-3% of your portfolio to an advisor and expect to spend as much as someone else who pays much lower fees.

    1. Michael, if you are paying 2%, they better be beating the index by 2+

  2. Already your approach is exciting - acknowledging that a retirement plan is so much less of a "plan" and so much more of an "if this + that + maybe this + assume the other" framework for a series of changing decisions and behaviour over a very long (hopefully) timespan is the only useful way of approaching the question, in my opinion.

  3. Simple answers aren't perfect but are better than nothing. Setting aside money every year is an effective way to prepare for the future — not that there's agreement on the right number or how to invest. Even so, building the habit builds the savings.

    Health is wealth and much can happen to us before we retire.

    Suppose we have a serious or extended illness. We could lose our income for weeks, months or years. We could also face large expenses. For instance, getting confined to a wheelchair could require home renovations and a different vehicle. Just because we ignore these risks doesn't make them go away. When properly configured, insurance makes an excellent investment for these uncertainties.

    PS We can take steps to increase our ability to earn, which makes saving easier (unless we spend the extra income).

    1. Hi Promod, thx for your comments. I have a tax centric calc and you have an insurance based outlook :)

  4. Great introduction Mark. There are so many variables when it comes to retirement planning, and the longer the time horizon the less certain we are about how things will play out.

    While having "a nest egg number" seems to offer certainty, this number will undoubtedly change as each of us approaches our retirement and we need to regularly examine and revise it as our circumstances change.

    That's why retirement planning isn't a task to be completed, checked off, and set aside. It is an on-going process through our life and yes, even into retirement. It can and should be an uplifting and reassuring process, not because it provides certainty but because it trains and empowers us to prepare for the unexpected.

    1. Hey Noel

      Well said, it is "an on-going process through our life and yes, even into retirement"

  5. After tax cashflow is what is key, There is a big difference in amount required to create a suitable retirement income between a RIF,a TFSA , and a non registered cash flow from T series, corporate class, etc.

    1. Yes, definitely an important factor, but one of several

  6. One of the concepts people find difficult to comprehend is that a retirement plan is not an estate plan . It is necessary to separate the Estate objective from the Retirement objective with tax efficieincy top of mind. Remembering the goal is to have zero in your "retirement account" at death .

    1. Maybe your goal, but not for many, who wish to leave a legacy. But that can also be done via insurance, so then u can die with nothing, however, not sure how you know can plan when u will die so that you will be done to nothing :)

  7. When I bought my little fishing boat, I struggled between getting a 30HP and a 40HP motor. The marina guy explained it thusly. "I've never had someone come back and tell me they wanted less horsepower". The implication being of course, that he's had people come back and want more horsepower.

    At the very core of my retirement planning is a similiar idea. How much do you need? You aren't ever going to have 'too much'. But you could have 'not enough'. Calculations and estimates are great to help set goals, but the answer to how much you need is always 'more', and the answer to how much to save is always 'as much as you can'.

    1. Glenn--I have a different philosophy. Don't be careless with your retirement, but enjoy your life. It is a fine balance, but I have seen too many people save and save and not enjoy their younger years.

  8. You must have different neighbours than I do. Pretty sure most of the folks around here are pre-spending what they don't have. Nobody looks to be suffering too much in their younger years when I look around.

    Well, other than me. With all the snow this year I kind of threw out there the idea of getting a snowmobile. Apparently that's not in the works, since I got the lecture about money/retirement. I'll make sure to point my wife to your post, as justification for me getting a new snowmobile right away. :)

    1. Tell her to call me. My perspective is tainted from having a father die at 54. That's the wildcard of all this retirement planning, how long do you live and how to enjoy living day to day, with one eye on the future.

  9. Great intro Mark...I like where this is going. How much is enough is not an easy question to answer and there really is no magic number, only a ballpark figure. I know for us it's more than $1M in investments, outside our pensions at work and a paid off home.

    Like Promod wrote, simple answers aren't perfect but are better than nothing. I couldn't agree with him more: "Setting aside money every year is an effective way to prepare for the future — not that there's agreement on the right number or how to invest."

    We're saving for retirement but we're also enjoying life. I could be dead tomorrow. I really hope not. I want to read your next blogpost.


    1. Thx Mark

      Gee, with $200k in yearly pensions and a million, you are set :)

      I could have used your comment "We're saving for retirement but we're also enjoying life. I could be dead tomorrow." for my response to Glenn above

  10. I like how you deeked us all out by stating "I I simply determined my spending requirements in retirement..."

    If only I had a better handle on what those were, I'd have a lot more confidence about whether we're getting close to being safe for retirement or not!

    Still I'm definitely hooked on this series. Taxes will have a big impact on many of us in retirement. To try to keep realistic I've been applying a 50% reduction to our RRSP values when I've been calculating our net worth. I'll be interested in seeing what you use in your test calculation.

    1. Thanks Bet. I guess being an anal accountant gives me a leg up on estimating my spending in retirement.

  11. If it's ok, I'd like to give my input on this because I'm very passionate about living frugally and living well at the same time. When I lived in Montreal, we (family of 5) consumed 5-7k per month in addition to a mortgage. Mortgage had about 15 yrs left but we were young so we were still ahead of the Jones'.

    Then enough was enough, read Possum Living, and I just needed to fast forward things. I moved to the country, cut my mortgage big time, was able to pay it off in 4 yrs (yes! it was that much cheaper!). Plus, we now live on 3k per month.

    We eat well, kids have their activities, etc. Life is good. Something I learned is that I can't really control how much money is coming in but I can have good control of how much we spend. Planning retirement with the expectation that things will stay the same is going to leave you with just a decade or so of retirement. But if you shift to a lower gear, you could be retired for several decades.

    We live on one salary and completely save the other. We keep track of every penny and I am confident that we can live on closer to 2k per month, if we weren't investing so much in our property.

    Take good care of yourselves everyone. Trying to stockpile huge amounts of cash is going to stress you out. And don't get that snowmobile! Get cross-country skiis instead.


    1. Thx SFT, a different view than most of my readers, but nice to have alternative viewpoints

  12. The Trinity Study which is the basis for the 4% rule assumed 1% investment management fees on top of the 4% annual withdrawal. If you are using low cost funds at 0.05% - 0.30% MER you have an additional built in safety factor.

    You can use a simulator like cFIREsim to test various portfolios to get a feel for how they would have performed against the data set available.

    This simulator allows you to try different WR strategies not just the 4% SWR.