Some of my clients are surprised to learn that I don’t follow specific spending rules, like the popular 4% rule, when building out retirement income projections.
My problem with spending rules stems from the fact that life doesn’t just move in a straight-line, AND we don’t have one pot of money called “retirement savings”.
Indeed, the idea that we’ll withdraw a fixed percentage of our portfolio (increasing annually with inflation) fails to account for periodic one-time expenses, the uptake of government benefits, the ability for couples to income-split, and the fact that many good savers will want to continue TFSA contributions into retirement.
The other, more practical reason for my disdain of spending rules is that they don’t tend to align with how retirees actually spend their money.
A spending rule attempts to solve for maximum spending (i.e. how much can I safely withdraw each year without running out of money in retirement).
But I would say almost none of my retired clients think that way. Most want to maintain the same standard of living that they enjoyed in their final working years, if not enhance it with additional money for travel, hobbies, and financial aid for their children and grandchildren – if possible.
If you’re a naturally good saver, and lived within or below your means all of your life, what makes you think you would spend the maximum amount each year in retirement, anyway?
That’s why I offer clients a spending range. We work together to establish their baseline spending – what they’re spending on average today. Let’s call it their comfortable spending floor.
Then I use my financial planning software to solve for maximum sustainable spending – the most they can spend without running out of money or tapping into home equity (if they own a home). Let’s call this the safe spending ceiling.
The sweet spot is typically in-between that range to leave a reasonable margin of safety for life’s unknowns like unplanned spending shocks, poor market returns, persistently high inflation, bad health outcomes, etc.
Most of the retirees I meet tend to cluster in two extremes. One group is terrified of sequence-of-returns risk and clings to “safe withdrawal rate” studies as if 4% were carved in stone; they end up chronically underspending and on track to leave a giant estate.
The other has binged on Die With Zero and wants to maximize spending – yet funny enough their actual behaviour rarely matches the book’s premise to drain every dollar.
Static rules feel too rigid and breed a scarcity mindset, while “spend it all” leaves little margin for error (and most people can’t bring themselves to stay at full throttle for 30-plus years anyway).
Even Ben Felix, who suggested early retirees might need to adjust spending to 2.7%, says PWL Capital doesn’t impose a fixed spending rule – he’d have a hard time telling a client to scrap a dream trip just because last year’s market returns were ugly and the model said-so.
So how do we find a middle ground? By replacing single-number rules with a dynamic floor-to-ceiling spending range that adjusts each year and respects the messy reality of multiple tax buckets, government benefits, and real human psychology.
Most debates about the 4 % rule (and Ben Felix’s 2.7 % update) focus on how much you could withdraw in the worst-case historical scenario. That’s academically useful, but it misses how real people spend money in retirement:
| Academic SWR Exercise | Real-Life Retirement Planning |
|---|---|
| One “retirement savings” bucket. | Several buckets—RRSP/RRIF, TFSA, non-registered, maybe a corporation—each taxed differently. |
| Single fixed withdrawal rate for 30 years. | Inflows and outflows shift every few years: CPP/OAS start, pensions index, income-splitting kicks in, the car needs replacing, grandkids arrive. |
| Goal: maximally safe spending. | Goal: comfortably satisfying spending—enough to live well without lying awake at night. |
| Result: one number (4 %, 2.7 %, etc.). | Result: a spending range that adjusts as life unfolds. |
Floor-to-Ceiling Planning: How I Frame It With Clients
- Establish the floor (comfort budget)
- We start with the client’s actual lifestyle spending today.
- That number – say $80k/year after-tax – usually feels conservative because it excludes one-offs like new roofs or bucket-list trips.
- Solve for the ceiling (safe max)
- I run the plan in my software, assuming inflation-adjusted annual spending and conservative average returns from a globally diversified portfolio.
- The model might show they could safely sustain $100k/year with a high degree of confidence, and without tapping home equity.
- Define the sweet-spot range
- We present both numbers side-by-side:
“Your safe spending range next year is $80k to $100k. Anywhere inside that band tests out fine.”
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- Clients suddenly see flexibility—they can upgrade the kitchen or take the European river cruise without fearing destitution.
- Re-run annually (dynamic spending)
- Each year we update the plan with actual returns, inflation, and life events.
- If markets are rough, the range might tighten to $78k to $95k; if returns are strong, it could widen to $82k – $105k.
- Think in terms of guardrails but tailored to each household’s tax buckets and cash-flow quirks.
Why Rigid Rules Fall Apart in Canada
- Layered Income Streams – RRIF withdrawals, CPP, OAS, and pension income all start (and can be split) at different ages. A flat “4 % of portfolio” ignores the tax arbitrage you get by, say, front-loading RRSP withdrawals before 65 and deferring CPP/OAS to 70.
- Tax-Free Room Regeneration – TFSAs let you withdraw for big purchases and recontribute next year. That alone breaks the math behind a fixed percentage rule. Not to mention retirees agonizing over safe RRIF withdrawals (like selling during a downturn) while simultaneously maxing out their TFSAs annually (buying that same dip).
- Behaviour Beats Math – In practice, most retirees underspend. They fear running out far more than they crave an extra vacation. A range, re-evaluated every year, gives permission to spend and a built-in brake when markets misbehave.
Takeaway
The 4 % rule – and Ben Felix’s sobering 2.7 % update – are useful guardrails, but they answer the wrong question for most families. Clients don’t want the theoretical maximum; they want confidence and flexibility.
By anchoring planning on a floor-to-ceiling spending range and refreshing it annually, you:
- Convert scary market noise into an actionable number (“Here’s your range for next year”).
- Empower retirees to live their best life when markets cooperate.
- Provide a transparent trigger for tightening the belt if returns disappoint – well before a true crisis hits.
That’s real-world financial planning: rules-of-thumb informed, but client-centric and dynamic.
This Week’s Month’s Recap:
Early this month I pondered whether AI would eventually replace financial planners. Great discussion in the comments.
Then I pointed out that retiring with debt isn’t the cardinal sin that it once was – particularly if you have strong pension income.
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Weekend Reading:
Is real estate the best investment for a Canadian retiree? Advice-only planner Jason Heath had three recent meetings with Canadian clients where he challenged their real estate strategies.
If your retirement plan counts on selling your home in a few years for 10% or 20% more than it is worth today, that may not happen.
Two Ontario landlords owed $70,000 after ‘professional’ tenants stopped paying rent and trashed the property.
Morningstar’s Christine Benz reflects on working longer, the benefits of staying flexible, and hopping off the hedonic treadmill.
A lot of investors hold concentrated positions in individual stocks. PWL Capital’s Ben Felix explains why that is riskier than you might think:
Fred Vettese looks at what asset mix minimizes your chances of a loss:
“The moral here? Even the most risk-averse retiree needs to accept a little investment risk.”
Finally, Preet Banerjee wonders when tipping diverged from a reward for good service to a wage-subsidization tactic.
Have a great weekend, everyone!
