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financial facelift

Rafal Gerszak

Bethany bought her first house two years ago with a big mortgage. It has risen substantially in value since then. Today, at age 56, she is house rich and cash-flow poor but happy. "Sort of."

Her house (in the Greater Vancouver Area) was recently assessed at $330,000 over the purchase price, Bethany writes in an e-mail. She brings in $88,130 a year from her government job plus $680 a month in rental income from a basement apartment. Her defined benefit pension plan will pay about $3,300 a month at age 65.

Bethany is tired of her job and really wants to retire in four years at age 60. "I want to travel extensively," she writes. She is striving to pay off a line of credit taken to pay for a new roof, to upgrade the basement suite, "and for all the extras that come with purchasing a home, things that I was not aware of or prepared for," Bethany writes.

"I am putting every extra cent toward paying off this debt, and I am living more frugally than I ever have." She is also repaying money borrowed from her RRSP under the federal Home Buyers' Plan.

Her questions: Can she retire in four years and perhaps work part time in some other job? Will she be able to take at least two big trips a year? "Do I have to sell my home in retirement?"

We asked Ngoc Day, a financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Bethany's situation. Ms. Day holds the certified financial planner (CFP) and registered financial planner (RFP) designations. Macdonald Shymko is a fee-only financial planning and portfolio management firm.

What the expert says

Ms. Day prepared two forecasts, one where Bethany quits at age 60 and another where she continues working to age 65.

Bethany's main asset is her home, followed by her pension, Ms. Day says. Bethany's savings are limited to $80,000 in her registered retirement savings plan.

"On average, Bethany barely manages to break even with her expenses," the planner says. Her expenses are likely understated. "There is no extra cushion for emergencies or major expenses like the replacement of a car or major house repairs." She has no budget for entertainment, hobbies or dining out.

At the rate Bethany is paying down her credit line, it will be paid off in a little more than two years, "before her dream retirement age of 60," Ms. Day says.

But can she afford to retire at 60? If Bethany retires early, she will get pension income and bridge benefits (to age 65) of about $3,600 a month. At age 65, the bridge benefit will end and she will begin collecting Canada Pension Plan and Old Age Security benefits.

She would still be repaying her home buyer's loan but she would no longer be making RRSP contributions. Ms. Day assumes the net rental income after expenses is about $340 a month.

The planner says Bethany could achieve "break even" cash flow if she retires early mainly because she would no longer be paying $700 a month to her line of credit. Her income taxes also would be lower. Still, "there is no extra cash flow for emergencies, or car replacement, or travel, which is high on her retirement wish list."

Bethany says she is willing to work part time at some other job beyond age 60, but "it doesn't make sense to leave her (existing) job with a defined benefit pension plan to work in a job with no pension," the planner says.

Ms. Day looks at how Bethany would fare if she worked to age 65.

At age 65, Bethany's pension would be about $3,300 a month. Her CPP benefits would be higher than if she began collecting them at age 60 and she would also be entitled to OAS. All expenses being the same, Bethany would have $4,500 a year more in cash flow under this alternative, an amount that could go toward her travel goal, Ms. Day says.

"It would be more beneficial for Bethany to remain in her job until age 65 in order to receive enhanced pension and CPP benefits."

If Bethany needed more breathing room, she could elect to defer her property taxes (she can do this in B.C.) with the understanding that the deferred property tax and interest will ultimately reduce the net proceeds when she sells her home, the planner says.

Any employment income Bethany may earn working part-time past age 65 could be used for expenses such as a new car. The planner suggests Bethany continue contributing to her RRSP while she is working rather than shifting to a tax-free savings account, as she has been thinking about doing. "At her current income level, she is at the 32.5 per cent marginal tax rate, so she would save $32.50 of income tax for every $100 of RRSP contribution."


The person: Bethany, 56

The problem: Can she retire in four years' time without having to sell her house?

The plan: Retiring early will leave her pinched financially. Instead, she should work to age 65 to benefit from higher pension and CPP benefits.

The payoff: Extra money to travel, an important goal. A retirement budget that should allow her to maintain her house for the foreseeable future.

Monthly net income: $5,780

Assets: RRSP $80,000; residence $849,600; estimated pension value $501,760. Total: $1.4-million

Monthly disbursements: Mortgage $2,500; property tax $115; utilities $165; home insurance $60; heat, hydro $120; garden $30; food and clothing $280; grooming, pets $90; health care $110; cellphone and Internet $120; transportation $290; miscellaneous $60; line of credit $700; RRSP $165; home buyer's loan $200; estimated pension plan contribution $915. Total: $5,920. Shortfall: $140

Liabilities: Mortgage $446,665; line of credit $18,000. Total: $464,665

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