Melody is age 60 and single with a government job and a defined benefit pension plan. Planning to retire in five years, she strives to pay off the $96,000 mortgage on her Toronto condo before then. She wonders if her income once she quits working will support her desired retirement lifestyle – including a couple of months in the sun each year.Matthew Sherwood/The Globe and Mail
Melody is age 60 and single with a government job and a defined benefit pension plan. She plans to retire in five years and is striving to pay off the $96,000 mortgage on her Toronto condo before then.
She wonders if her income once she quits working will support her desired retirement lifestyle – including a couple of months in the sun each year.
Melody earns $66,600 a year, an amount that she says will increase by 4 per cent a year to a maximum of $80,000 before tax. Her pension plan will pay $18,600 a year at age 65, indexed to inflation.
"What is the best strategy to pay off my mortgage by 65 but still contribute to my RRSP and tax-free savings account?" Melody asks in an e-mail. "Should I take Canada Pension Plan benefits at age 60 and invest the money in my RRSP?"
Her goal is to retire with $45,000 a year after tax, "but I need a strategy to get there," Melody writes. "In what way can I minimize income taxes in retirement?" she asks.
"I would like to spend a couple of months during the winter in Florida or Belize," she adds. "Can I afford it?"
We asked Heather Franklin, a fee-for-service Toronto financial planner, to look at Melody's situation.
What the expert says
Melody is paying a little extra on her mortgage and making biweekly payments with the aim of having it paid off in five years rather than the eight years or so remaining, Ms. Franklin says. Each time she gets a pay raise or a tax refund, she should apply the extra money to the mortgage.
Paying off the mortgage will free up about $1,000 a month, Ms. Franklin says. Melody should put as much of this extra cash flow as possible into her tax-free savings account, "which is more versatile and flexible than her RRSP," the planner says. She could use some of her TFSA savings for big expenses such as replacing her vehicle.
The planner does not recommend that Melody take early CPP to invest the money in her RRSP. First, taking CPP benefits at age 60 rather than age 65 would result in a permanent loss of 40 per cent of her benefits. Second, she would be required to pay her current tax rate of 33 per cent on the additional CPP benefits.
"Consequently, to make up for the loss of some of her CPP income during retirement, Melody would have to draw down additional monies from her RRSP at age 65, before the funds have had adequate time to grow," she says.
Next, Ms. Franklin looks at Melody's retirement income. She has $119,000 in her RRSP, which would rise to $170,000 by age 65 assuming a 4 per cent average annual growth rate.
"This total is contingent upon her continuing her contributions and remaining employed to age 65," the planner says.
The RRSP will continue to grow to about $210,000 by the time Melody is 71 and has to convert it to a registered retirement income fund. (This assumes she does not tap the RRSP funds sooner.)
As long as she has a mortgage to pay off, Melody is not able to take full advantage of her tax-free savings account, the planner notes. She is contributing only $200 a month. She could try to catch up with her unused room once the mortgage is paid off.
The planner suggests Melody allocate part of her TFSA to a savings account to serve as an emergency fund. The other part could be invested long term in much the same way as her RRSP funds, targeting an average annual return of 4 per cent. This would "provide an enhanced additional stream of income," Ms. Franklin says.
When she retires, Melody will get $12,000 a year in CPP benefits, $6,700 a year in Old Age Security and $18,600 from her pension, for a total of $37,300 a year before tax, indexed to inflation. This should be enough to meet her needs, the planner says. (Her core lifestyle spending, excluding mortgage and savings, is about $23,760 a year.) She could tap her TFSA if needed.
Provided she leaves her RRSP/RRIF intact until age 72, Melody will have enough money to supplement her pension and government benefits for 20 years. Her minimum withdrawal would start at about $14,000 a year. As for wintering down south, Melody may have to settle for one of the less expensive holiday destinations.
CLIENT SITUATION
The person: Melody, 60
The problem: Can she pay off her mortgage in five years and still save a little extra for retirement?
The plan: Throw everything at the mortgage until it is paid off, then shift emphasis to TFSA contributions. Be prepared to settle for a more modest retirement lifestyle than she had aspired to.
The payoff: Financial security.
Monthly net income: $4,315
Assets: TFSA $5,620; RRSP $119,000; estimated present value of DB pension $250,000; residence $320,000. Total: $694,620
Monthly disbursements: Mortgage $1,085; property tax $170; home insurance $25; condo maintenance fee (includes utilities) $460; transportation $420; groceries, clothing $275; gifts, charitable $60; vacation, travel $100; personal care $75; dining, entertainment $200; dentist, drugstore, group insurance $50; telecom, Internet, TV $145; RRSP $325; TFSA $200; pension plan contributions $435. Total: $4,025
Liabilities: Mortgage $95,600 at 2.5 per cent
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