In later adulthood brain pathology becomes common and trajectories of cognitive change are heterogeneous. Among the multiple determinants of late-life cognitive course, cognitive reserve has been proposed as an important factor that modifies or buffers the impact of brain pathology on cognitive function. This article presents and investigates a novel method for measuring and investigating such factors. The core concept is that in a population where pathology is common and variably present, 'reserve' may be defined as the difference between the cognitive performance predicted by an individual's level of pathology and that individual's actual performance. By this definition, people whose measured cognitive performance is better than predicted by pathology have high reserve, whereas those who perform worse than predicted have low reserve. To test this hypothesis, we applied a latent variable model to data from a diverse ageing cohort and decomposed the variance in a measure of episodic memory into three components, one predicted by demographics, one predicted by pathology as measured by structural MRI and a 'residual' or 'reserve' term that included all remaining variance. To investigate the plausibility of this approach, we then tested the residual component as an operational measure of reserve. Specific predictions about the effects of this putative reserve measure were generated from a general conceptual model of reserve. Each was borne from the results. The results show that the current level of reserve, as measured by this decomposition approach, modifies rates of conversion from mild cognitive impairment to dementia, modifies rates of longitudinal decline in executive function and, most importantly, attenuates the effect of brain atrophy on cognitive decline such that atrophy is more strongly associated with cognitive decline in subjects with low reserve than in those with high reserve. Decomposing the variance in cognitive function scores offers a promising new approach to the measure and study of cognitive reserve.