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On the verge of retirement, Rhonda must decide whether to stay in her current house or downsize.JASON FRANSON/The Globe and Mail

At 65, Rhonda is facing the prospect of retiring next summer with some trepidation. She will have a small work pension to add to her rental income and government benefits, but little in the way of savings. Meanwhile, she has a house with a mortgage to maintain, an older car and a line of credit.

"I plan on paying off my line of credit in the next year and having another $15,000 in savings when I retire," Rhonda writes in an e-mail. "That would allow for any unexpected expenses for my car or house."

Over the years, she has "completely renovated" her Alberta house except for the furnace, which will need to be replaced at some point, Rhonda adds. She has been bringing in about $70,000 a year, plus income from a rental unit in her house and Canada Pension Plan benefits. She began taking her CPP benefit at age 60, so the amount she is getting is lower than it otherwise would have been. Her main question: "Should I stay in my home after I retire, which I would really like to do?" If she sells, she would trigger a capital gain on the part of the house that is rented out, she notes. "I have just renegotiated my mortgage, so I can make very low payments, allowing me to stay in my home for at least one year after I retire," Rhonda writes.

Her retirement spending goal is $36,000 after tax, which she hopes will allow her to visit her son in Southern Ontario twice a year and to take one trip outside the country each year to stay with friends.

We asked Heather Franklin, an independent financial planner in Toronto, to look at Rhonda's situation.

What the expert says

Rhonda realizes she will be facing a cash-flow crunch when she quits working, Mr. Franklin says. In addition to her pension income of about $12,000 a year, she will have rental income of $10,500, Canada Pension Plan benefits of $7,345 and Old Age Security benefits of about $7,025 (2017 rate), for a total of $36,870 a year before tax. That's about $31,340 after tax.

Currently, Rhonda is spending about $39,325 a year. That would be a shortfall of nearly $8,000 a year or about $665 a month.

Rhonda has $25,000 in guaranteed investment certificates and $35,000 in high-fee mutual funds held in a registered retirement savings plan.

Even with her relatively modest cost of living, Rhonda might want to examine her current budget carefully. Any surplus should go to paying off her line of credit before she retires, the planner says. She could arrange to have monthly payments taken directly from her bank account each payday.

As well, Rhonda should seriously consider working a couple more years if possible, or perhaps work part-time. This would enable her to save a bit more "and position herself for a more comfortable retirement."

Downsizing sooner rather than later would be prudent, Ms. Franklin says. "If she were to downsize, she could eliminate the mortgage entirely." Being free of debt would give Rhonda greater control of her finances and "increase her sense of financial well-being," the planner adds.

Rhonda is considering either renting or buying a less-expensive house that also has a rental unit. It might make more sense to buy a centrally located condo (average $240,000) so she could get by without a car, Ms. Franklin says. Condo fees would be roughly equivalent to the cost of carrying her house now, excluding the mortgage payments, and she'd have a cash cushion to invest.

If she does buy a condo, Rhonda should look for an established building that is well managed and has a healthy reserve fund to guard against special assessments for major repairs.

On the downside, if Rhonda moved to a condo, she would forgo rental income of almost $900 a month. "However, if she does not have mortgage payments ($515) and auto expenses ($400), she'd be ahead by more than $900 a month," the planner says. With a condo, "she would never need to replace a roof or a furnace or deal with the ongoing maintenance that homeownership requires."

On the savings front, Rhonda should open a tax-free savings account and shift the GICs in her non-registered account to the TFSA, the planner says. The TFSA could also serve as an emergency fund.

The mutual funds in her RRSP carry high fees, which are "hampering the growth of her investments," Ms. Franklin says. Rhonda might consider opening a self-administered RRSP account at a discount broker and buying some low-fee, balanced mutual funds or exchange-traded funds that are in line with her risk tolerance.


The person: Rhonda, 65

The problem: Should she sell her house and downsize when she retires?

The plan: Sell the house and buy a centrally located condo with a fat reserve fund.

The payoff: Financial security

Net income: $5,125

Assets: GICs $25,000; mutual funds in RRSP $35,000; residence $475,000. Total: $535,000

Monthly outlays: Mortgage $515; property tax $325; home insurance $50; utilities $300; maintenance $50; transportation $400; groceries $400; clothing $50; gifts, charity $100; vacation, travel $325; personal care $60; dining, entertainment $250; theatre $30; dentists, drugstore $60; health, dental insurance $190; phones, TV, internet $170. Total: $3,275. Surplus: $1,850 (goes to home improvements, unallocated spending, savings).

Liabilities: Mortgage $132,000; line of credit $16,000. Total: $148,000

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