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(Moe Doiron/The Globe and Mail)
(Moe Doiron/The Globe and Mail)

FINANCIAL FACELIFT

Does this teacher have enough for early retirement? Add to ...

As a teacher, Victoria can retire with an unreduced pension of more than $55,000 a year in November, 2016.

She is 53 and earns $100,250 a year. She makes another $6,000 a year teaching night classes.

Before she leaves her well-paying job, though, Victoria plans to take a leave of absence next year to test the waters teaching overseas, where wages are high and taxes low.

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“If my year away is wonderful and I can continue to work overseas, I will consider retiring earlier provided I can find ways to close the difference in pension income (between retiring in 2016 and retiring in June, 2014),” Victoria writes in an e-mail.

Her pension is partly indexed to inflation. When she turns 65, her pension benefits will be reduced by the amount of Canada Pension Plan benefits she receives.

Following a series of unfortunate events, Victoria is not in great financial shape for a person in her 50s contemplating quitting a good job for an uncertain future: She has a mortgage of $306,000 and consumer debts of $50,260. Her savings, apart from her pension plan, total $2,250, leaving her with a negative net worth.

Victoria wonders whether she should sell her Toronto-area condo, which she estimates is worth $350,000, if she leaves the country – or even if she does not.

“Am I on track to having enough money to fund my retirement if I retire at 56?” Victoria asks.

We asked Heather Franklin, an independent financial planner based in Toronto, to look at Victoria’s situation.

What the expert says

Unfortunately, Victoria “is not in a financially stable position to retire,” Ms. Franklin says. Victoria’s pension, valuable though it may be, “is her only asset in a sea of debt.”

Before she quits her job, Victoria should pay down her debts, the planner says.

“The first rule of retirement is no mortgage. The second rule is little or no consumer debt.”

While Victoria’s living expenses are not unreasonable for Toronto, she would have trouble keeping up with them if she had to depend on her pension income alone.

During the year she is teaching overseas, Victoria should continue making her pension plan contributions (about $1,300 a month), her life and health insurance, and her Canada Pension Plan contributions, Ms. Franklin says.

If Victoria continues working until she is 65, she should be able to pay off her non-mortgage loans, saving her a substantial sum each month.

She will also have paid down her mortgage in that 12-year span, and her gasoline expenses will be lower because she won’t have to drive as much.

If she doesn’t want to continue in her job for that long, she should work at least until her consumer debt is erased, Ms. Franklin says.

Should she sell her condo?

“She may be further ahead by renting rather than servicing a mortgage and consumer debt,” the planner says.

By having such a large mortgage, Victoria is exposed to future increases in interest rates and condo fees. If she sells, though, she is unlikely to net enough to repay all of her debts.

Eating into her $44,000 in equity will be real estate and legal fees, which could add up to $16,000.

“Several thousand dollars of consumer debt will remain,” Ms. Franklin says.

As well, the Toronto condo market is soft at the moment, so Victoria may not get as much as she hopes. She might want to consult a salesperson to see whether her expectations are in line, and also shop around to see how much she would have to pay to rent.

If she retires sooner rather than later, Victoria may be forced to sell her condo if she can’t find enough work to cover her living expenses.

“Monthly expenditures of $2,500 toward debt servicing for consumer debt and mortgage debt on a [net] retirement income of $3,675 a month does not leave much for living expenses such as condo fees, property taxes and vehicle costs,” Ms. Franklin says.

While retiring early is appealing, Victoria could be leaving herself vulnerable to not finding other work that is suitable because of ill health, economic recession or increased competition from younger teachers in her field.

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CLIENT SITUATION

The person

Victoria, age 53

The problem

Given the size of her debt load, can she afford to retire in three years?

The plan

Continue working, paying down her loans. Decide if selling her condo and renting makes sense financially.

The payoff

The financial nimbleness to weather unexpected events.

Monthly net income

$6,540

Assets

Present value of pension $1.1-million; condo $350,000; bank $200; TFSA $850; RRSP $1,200. Total: $1.45-million

Monthly expenditures

Mortgage $1,150; condo fees $595; property tax, insurance $215; utilities $100; car insurance, maintenance $890; vehicle debt $450; clothing $50; groceries $300; line of credit $620; credit card debt $300; gifts $30; dining out, entertainment, personal discretionary $275; grooming $65; memberships, subscriptions $105; life insurance $110; telecom $205; professional dues $50; pension contribution $1,300. Total: $6,810

Liabilities

Mortgage $306,000; line of credit $36,000; credit cards $4,660; car loan $9,600. Total: $356,260

Special to The Globe and Mail

Read more from Financial Facelift.

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Some details may be changed to protect the privacy of the persons profiled.

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