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Cash challenged, but a house to fall back on


Jennifer Roberts for The Globe

A few years ago, Jasmine and Danush bought a little fixer-upper house in downtown Toronto that has turned out to be a money pit.

Now, with modest income - together they net about $70,000 - they wonder whether they can afford to keep their home or whether they should sell it and buy a condo apartment.

She is 47, he is 46. They both plan to work until they are 65. They are worried because they seem to have nothing left at the end of each month to tuck away for retirement. He has a company pension, she does not.

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"We have no dependents, no car, we don't drink or smoke or spend a lot on entertainment, but we can't seem to save much," Jasmine writes in an e-mail.

"We're debating whether the house is too expensive for us to maintain, or if we should hang on to it for dear life in the hope that real estate values in Toronto will continue to rise and that in 20 years we'll be able to downsize with some cash left over," she adds. Their number one goal is a secure retirement.

Danush recently inherited $50,000, which will cover much-need repairs.

We asked Norm Collins of Collins Financial Consulting in Dartmouth, N.S., to look at their situation.

What the Expert Says

Things aren't as bad as they seem, thanks in part to the inheritance, Mr. Collins says.

If Jasmine keeps contributing to her registered retirement savings plan and they both save like crazy once the mortgage is paid off in 2024, they will be able to live comfortably when their working years are over, he predicts. She will be 61 and he will be 60 when the mortgage is paid off, giving them four or five years to save as much money as possible.

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They will need it because their income will fall short of their expenses for a full 10 years after they turn 65.

Let's look at the numbers.

By 2030, when they are both retired, their savings will have grown to $577,500, not including the house, Mr. Collins says. That assumes continuing RRSP contributions and net returns of 3 per cent a year on their guaranteed investments and 4 per cent on their equities.

In her first year of retirement, Jasmine will get $13,400 from the Canada Pension Plan and $9,200 of Old Age Security. Danush will get $9,200 of OAS, $11,500 of CPP and a teacher's pension of $29,500, bringing their total income to $72,800 in 2030 dollars.

Their expenses are forecast to rise at 2.25 per cent a year to $86,700 a year by 2030, leaving a shortfall of $13,900. The shortfall will grow smaller once they start drawing on their RRSPs.

"Non-registered savings accumulated between age 60 and 65 (or whenever the mortgage is retired) can then be used to cover the deficits," Mr. Collins says.

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Danush and Jasmine would still have their house to fall back on. If they were to downsize then and move to a condo, they could invest the balance, giving them more retirement income.

But Danush and Jasmine face risks in the years before their mortgage is paid off, Mr. Collins notes.

"Much can change over that time," he notes. They may lose their jobs or run into health problems. If they could put another $7,600 a year toward the mortgage - about $630 a month - it would be paid off five years earlier, giving them added security.

"Their home appears to be important to them," the planner says.

So where would the extra money come from?

Some of their spending is discretionary, Mr. Collins says. They are budgeting $8,000 a year for home maintenance, but much of the work might be completed with the $50,000 inheritance. They could also scale back spending on groceries and eating out, vacations, entertainment and clothes.

As well, they could shift Jasmine's RRSP contribution money to the mortgage instead, especially if and when interest rates begin to rise. They could catch up with their RRSP contributions once the mortgage is paid off.

"The key issue here is that should something unforeseen happen, they will have considerably more flexibility if the mortgage is behind them," Mr. Collins says. He also recommends they take out enough term life insurance to cover the mortgage principal.

THE PEOPLE: Jasmine, 47 and Danush, 46.

THE PROBLEM: Is fixing up their house, with its seemingly never-ending maintenance costs, jeopardizing their retirement?

THE PLAN: Use Danush's inheritance to make essential home improvements, and devise a savings strategy to pay down the mortgage more quickly.

THE PAYOFF: A home to be proud of and that will be debt-free within 10 years.


ASSETS: House, $500,000; registered investments $32,500; non-registered investments $33,600; TFSA $20,200. Total $586,300.

MONTHLY DISBURSEMENTS: Mortgage $1,565; home maintenance $667; property taxes $183; house insurance $92; health and life insurance $160; transportation $250; heat, power and water $255; cable, phone and Internet $95; food and restaurants $1,000; clothes $250; charities $42; gifts $100; vacation $750; entertainment $333; other $217; RRSP $400. Total $6,358

LIABILITIES: Mortgage $214,600. Total $214,600.

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