Caroline is single again with a grown son and an executive-level government job earning about $164,000 a year. She'll be 56 next month and is wondering whether she can retire at age 60.
She asks if it is feasible to pay off her remaining mortgage by the time she quits work or whether renting an apartment would be a better option. "I'd rather not work right till 65 if possible," Caroline writes in an e-mail. She bought her house recently for $438,000 and figures it is worth a bit more now. She has a substantial mortgage.
Fortunately for her, Caroline has a defined-benefit pension plan at work. Her short-term goals are to travel and upgrade her bathroom. Longer term, she wants to buy another vehicle, build a new garage and pay off her mortgage. Aside from her pension plan, she does not have much in the way of savings.
We asked Marc Henein, an investment adviser with Scotia Wealth Management in Mississauga, to look at Caroline's situation. Mr. Henein holds the certified financial planner (CFP) designation.
What the expert says
Mr. Henein notes that Caroline has two questions: How long will it take to pay off her mortgage, and when will she be able to retire comfortably?
Caroline's mortgage balance is currently $332,000 at a rate of 3.2 per cent. She is paying $1,950 a month. At this current rate, it will take her 19 years to pay off her debt, the planner says. At 65, her realistic retirement age, she will still have 10 years of mortgage payments, he adds.
An option Caroline asks about is selling her house in retirement and renting. "I think we are starting to see this trend and that it will continue," the planner says. Once Caroline has retired, renting may be a good option to give her more flexibility to travel, which she mentions is one of her goals. "The savings will be compelling." She can rent a condominium near her current house for about $2,000 per month versus the $2,700 per month she is currently spending on her house, Mr. Henein says.
Caroline has accumulated about $100,000 of equity in her house that she can unlock to help fund her retirement expenses. Her ongoing mortgage payments, along with the potential for growth in the real estate market, will create more equity for her between now and when she decides to retire.
One of Caroline's questions is whether she can afford to retire at the age of 60, Mr. Henein says. "I don't believe this is financially realistic given her debt load and the material jump in her pension payout between the ages of 60 and 65." Caroline would leave $17,000 a year of pension income on the table if she was to retire early, the planner says. "With the reduced pension amount, she will not be able to sustain her current expenses."
The primary source of Caroline's retirement income will be from her defined-benefit pension plan. She has a chequing account with $10,000 and an RRSP worth $31,200. At age 65, her pension plan will pay out $83,650 a year. In addition to this, she will have Canada Pension Plan and Old Age Security benefits, which combined should be worth about $15,000 by 2025.
Her combined annual income of $98,000 from her workplace and government pensions together would put her in a 26-per-cent tax bracket, Mr. Henein says. This means she will have about $73,000 a year after tax or about $6,000 a month. This will go up slightly when she turns 72 and converts her RRSP to a registered retirement income fund (RRIF) and begins making mandatory minimum withdrawals.
Her current monthly spending, excluding savings and pension contributions, is $5,633. "This tells us she can sustain her current lifestyle in retirement," Mr. Henein says. If she keeps her house, she will be age 75 by the time she is mortgage-free in 2035.
"The decision Caroline needs to make relating to her living situation is: Does she think her home will be worth more at 65 (her retirement date) than today?" the planner says. If so, she can hold on and continue to pay down the mortgage.
When she quits working, she will have to decide whether selling her house and saving about $700 a month gives her the financial flexibility she is looking for to travel, the planner says. Financially, she can afford to make her mortgage payment from 2025 to 2035, so it is more of a personal decision combined with the outlook for the local real estate market.
Her retirement cash flow from age 75 and beyond, when she will be debt free, will materially improve. Her expenses will fall to $3,680 a month, much less than her pension income of $6,000 a month, the planner says.
Can she retire at age 60 even with her big mortgage, or should she sell her house and rent?
Plan on working to age 65. Consider selling the house and renting – investing the proceeds – after she has retired from work, although she could afford to keep paying the mortgage if she chose to.
A realistic understanding of her choices on the road to financial security.
Monthly net income:
Bank accounts $10,000; RRSP $31,200; commuted value of defined benefit pension plan $800,000; residence $438,000. Total: $1.28-million
Mortgage $1,950; property tax $300; water, sewer, garbage $190; home insurance $110; heating $105; security $42; maintenance $15; transportation $295; groceries $450; clothing $135; car loan $605; gifts, charitable $570; vacation, travel $200; grooming $90; dining, entertainment $585; sports, hobbies $50; other personal discretionary $345; unallocated credit card payments $200; life insurance $60; telecom, TV, Internet $140; pension plan contributions $1,750. Total: $8,187
Liabilities: Mortgage $332,455; car loan $3,635. Total: $336,090
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