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CHAD HIPOLITO/The Globe and Mail

Trysta and Janice consider themselves middle-class Canadians with "real" questions that are more valid than many presented to Financial Facelift.

Trysta is 57 and has a well-paying job in education, grossing $100,000 a year. Janice is 46 and on long-term disability that pays her $48,000 a year. They have two grown children but no "significant" plans for a legacy. Their biggest concern is the mortgage on their B.C. house. They wonder if it will stand in the way of Trysta's early retirement.

"When will Trysta be able to retire?" they ask in an e-mail. "Is age 60 achievable? Should we pay off our mortgage? Should we downsize?" They are considering selling their home and buying a more modest house, Janice writes. They would move to a lower-cost area, so they would no longer have a mortgage. They wonder, too, how their financial portfolio should be structured.

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If Trysta does retire early, their income would take a steep drop and they'd be relying heavily on Janice's disability income in the early years.

We asked Ian Black, a fee-only financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Trysta and Janice's situation. Mr. Black holds the registered financial planner (RFP) designation.

What the expert says

"A retirement age of 60 for Trysta is an achievable goal," Mr. Black says. Their cash flow at that time would be about $61,700 a year, short of their $66,000-a-year target. Janice's $48,000 disability income, which continues to the age of 65 (when Trysta will be 76), would make up a good portion of their retirement income.

The initial shortfall would come from their savings. At 65, Trysta would begin collecting Canada Pension Plan and Old Age Security benefits. Trysta would begin drawing on her defined contribution pension plan, which is essentially an RRSP, at 72.

The planner has assumed a rate of return of less than 5 per cent on a portfolio of 40-per-cent fixed income and 60-per-cent equities. A higher return of, say, 6 per cent would make a significant difference given the 35 or 40 years they have to provide for themselves.

Before Trysta quits, they should carefully consider whether they will be able to live the lifestyle they want on $66,000 a year, Mr. Black says. "A drop in after-tax income from $120,000 a year currently to $66,000 is a significant one-year decline," the planner notes.

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Trysta and Janice want to make sure the other is financially secure if something should happen to either of them, he notes. Janice's disability insurance is "an extremely valuable asset for the couple," Mr. Black says. If Janice passes away prematurely, the loss of this income source would alter Trysta's retirement plan, but given the changed circumstances there still would be significant equity in the home, he says. Life insurance would normally be suggested to cover this possibility, but given Janice's disability, she may not be eligible, the planner adds.

Since their target income in retirement is $66,000 a year after tax, there is a gap of about $4,300 a year between what they can reasonably expect from retirement at 60 and what they hope to achieve, the planner says. "Downsizing the home and paying off the mortgage completely would be one way of bridging this gap."

If they downsized when Trysta retired at 60 and bought a new, less expensive home mortgage-free with the equity, they would be able to achieve a lifestyle closer to $74,500 a year, well above their targeted spending, Mr. Black says. "Their new home might be smaller, or farther from the city centre, or both, but they would be debt-free."

If they prefer to stay in their current home after Trysta retires, they could then decide to downsize at any point, the planner says. "There is a slight advantage in downsizing earlier, as this would cost them less mortgage interest, but the effect of waiting a full 10 years post-retirement to downsize is only about $1,000 a year in reduced lifestyle," he adds.

An alternative would be for Trysta to keep working to age 65, which would increase their retirement income. "Were they to focus on paying down the mortgage by about $5,000 more a year, retirement at 65 would permit a lifestyle of around $73,000 a year," Mr. Black says.

As for their financial portfolio, it could be slightly more aggressive, Mr. Black says. "Their current asset mix seems heavy on fixed income and light on equities." He recommends a mix closer to 40-per-cent fixed income and 60-per-cent equities. The stock component could be exchange-traded funds or F-class mutual funds for diversification and lower embedded costs. F class mutual funds have lower fees because they do not pay trailing commissions, typically 1.0 per cent, to the adviser or salesperson. They are used most often in fee-based accounts where the adviser compensation and investment management costs are separated.

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"They can afford to take slightly more risk as Janice's disability payments are guaranteed to age 65 (she is 46) and tax-free."

++++++++++++++++

The people: Trysta, 57, and Janice, 46.

The problem: Can Trysta retire at age 60 despite the mortgage on their home, or should they downsize?

The plan: If Trysta retires early, prepare for a big drop in disposable income. Otherwise, she should consider working longer. They could sell their house and buy a less expensive one at some point.

The payoff: An understanding of what it will take to ensure their financial security.

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Monthly net income: $10,000

Assets: Trysta's stocks and mutual funds $136,000; Trysta's TFSA $49,000; Janice's TFSA $37,000; Trysta's DC pension plan $153,000; Janice's RDSP $9,000; Janice's RRSP $218,000; residence $650,000. Total: $1.25-million

Monthly disbursements: Mortgage $1,600; property tax $330; water, sewer $70; home insurance $120; hydro, heat $125; maintenance $75; garden $150; transportation $415; grocery store $500; clothing $160; line of credit $500; gifts, charitable $75; vacation, travel $1,100; dining, drinks, entertainment $400; grooming $140; club memberships $200; golf $100; pets $60; subscriptions $30; doctors and dentists $100; vitamins, supplements $30; cellphone $150, TV, Internet $120; TFSA $460; pension plan contributions $500. Total: $7,510.

Liabilities: Mortgage $320,000; line of credit $12,000. Total: $332,000.

Want a free financial facelift? E-mail finfacelift@gmail.com. Some details may be changed to protect the privacy of the persons profiled.

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