I’m all about sharing good Canadian centered personal finance information, and I came across a great strategy about finding your retirement number. You’ve probably wondered whether you need $1 million to retire in Canada, the honest answer is, maybe, but maybe not. In his YouTube video, Nick Hearne, CFA and CFP, Financial Advisor and Portfolio Manager at RGF Integrated Wealth Management, breaks the math into three parts: what you’ll spend, what reliable income you’ll have, and the gap your investments need to cover. Once you look at retirement that way, the question gets a lot easier to handle.
Why there isn’t one retirement number for everyone
A lot of people want a simple answer to retirement planning. One number. One target. One finish line. It would be convenient if retirement worked that way. It doesn’t.
As Hearne explains, there’s “no universal number like a million dollars” because two households can want the same lifestyle and still need wildly different amounts saved. One couple may have strong pensions and CPP. Another may depend almost entirely on RRSPs, TFSAs, and non-registered savings.
Retirement isn’t about replacing your full paycheque. It’s about paying for your life after work stops.
That’s the key shift. While you’re working, your income does two jobs. It pays today’s bills, and it funds tomorrow’s retirement. Once you’re retired, that second part disappears. You no longer need employment income to cover retirement savings contributions. The method is simple:
- Estimate your retirement spending.
- Figure out your reliable income sources.
- Calculate the gap your investments need to fill.
That gap is what turns a vague retirement dream into a real number. It’s also why one person’s retirement number can look modest and another person’s can be much higher, even if both imagine the same yearly spending.
Step 1: Start with retirement spending, not your salary
When people ask how much they need to retire, they’re often really asking how much income they’ll need every year once work ends. That’s a better question than asking how much of their salary they need to replace.
Your salary is the wrong target because it includes more than day-to-day living. It also includes money you put aside for retirement. Once you’re retired, you stop saving for retirement, so you don’t need to replace that part.
Retirement spending is about covering your lifestyle without employment income. That includes the basics, like mortgage or rent, groceries, gas, entertainment, and travel. The tricky part is that some of those costs change once work is out of the picture.
Some expenses often shrink or disappear in retirement:
- Mortgage payments, if your home is paid off
- Daycare costs
- Commuting expenses
- Eating out as often, for some households
Other costs can move in the opposite direction. Travel is the obvious one. Many people plan to do more of it once they have the time.
That doesn’t mean everyone spends less in retirement, but Hearne’s broad point makes sense: most people see their spending needs come down. That’s why retirement planning works best when you build from expected expenses, not from your employment income. A household budget that made sense during your working years might not fit your retirement years at all.
If there’s one takeaway from this step, it’s this: your goal is to cover expected retirement spending, not to your old paycheque.
Step 2: Add up your reliable income sources
Once you know what you expect to spend, the next piece is your reliable income.
Hearne uses that phrase practically. Reliable income is money that is recurring, consistent, and not tied to selling or withdrawing from your retirement assets. In other words, this is the income you get whether or not you touch your portfolio.
That can include:
- A defined benefit pension
- Canada Pension Plan (CPP)
- Old Age Security (OAS)
- Rental income
- Annuity income
This part matters more than people think. Two retirees with the same spending target can land in completely different positions depending on how much of that target is already covered by reliable income.
It’s also not enough to know the headline amount. Hearne makes the point clearly: know more than just the amount. You also want to know when the income starts, whether it’s indexed to inflation, whether there’s any risk of the payer defaulting, and whether a surviving spouse keeps receiving it if one partner dies.
Those details can change your plan in a big way. A pension that rises with inflation is different from one that doesn’t. CPP claimed earlier is different from CPP claimed later. A benefit that disappears after one spouse dies creates a different risk than one that continues.
Step 3: Calculate the gap your investments need to fill
This is where your retirement number starts to take shape. I recently had this discussion with my sister. I was trying ti help her understand the what her pension would provide and what she would need to invest to be able to retire. The formula is simple:
Retirement spending – reliable income = retirement income gap
That gap is the amount your investment assets need to generate year after year. Think RRSPs, TFSAs, and non-registered accounts. If your reliable income already covers most of your spending, your retirement number may be lower than you expected. If it covers very little, you’ll need a larger pool of assets.
Hearn uses the example of two couples to outline this:
| Couple | Annual spending goal | Reliable income | Annual income gap |
|---|---|---|---|
| Jack and Sophie | $100,000 | $17,500 | $82,500+ |
| Gordon and Helen | $100,000 | Enough after tax to meet goal | $0 |
Same spending goal, different work history, completely different income gap.
Why rules of thumb like the 4% rule can miss the mark
Once you know your annual income gap, the next question is: how much do you need to cover it? This is where rules of thumb like the 4% rule come in. The basic idea is that if you need $40,000 a year from your investments, you’d want about $1 million invested. Another way to say it is that your portfolio should be about 25 times your annual withdrawals.
Hearne points out that the rule depends on assumptions about inflation and returns. In the example he gives, a 4% inflation-adjusted withdrawal rate works if inflation is 2% and your net investment return is 6%. Whether that fits your situation depends on how your portfolio is invested, and that depends on your ability and willingness to take risk.
Then there’s tax, which can change things. This comparison shows why account type matters:
| Withdrawal source | Amount withdrawn | Approximate amount available to spend |
|---|---|---|
| TFSA | $100,000 | $100,000 |
| RRSP | $100,000 | Depends on tax bracket and province |
With a TFSA, a $100,000 withdrawal can mean $100,000 to spend. With an RRSP, that same $100,000 is taxable. For high-income earners, the amount left after tax could be less than $50,000.
That’s a massive difference, and it’s why general rules can only take you so far. A personalized income projection is the better way to estimate your retirement number. Rules of thumb are fine for a rough temperature check. They’re not the final answer.
A practical way to estimate your retirement number
The useful thing about Hearne’s method is that it asks you to work through a sequence. Start with spending. Then look at reliable income. Then calculate the gap. Only after that do you estimate the investment assets needed to cover it. Here’s the process:
- Estimate how your spending will change in retirement.
- List every reliable income source and check the details.
- Subtract reliable income from spending to find the yearly gap.
- Estimate how much in retirement assets you’ll need to generate that income.
If you want more background on how Hearne works with clients, you can read about his approach to retirement planning and the retirement planning process he follows.
Your retirement number starts with better math
The hardest part of retirement planning is often the question itself. “How much do I need?” Your retirement number comes from the gap between what you want to spend and what reliable income will already cover. Once you know that gap, the rest of the planning becomes more concrete.
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