Since their June wedding, Jen and Jay have been consolidating their finances with a view to paying off their mortgage as quickly as possible and retiring in a few years. She is 57, and he will be 60 this fall.
Both have senior positions, Jay in management, Jen in education. Together they bring in $260,240 year. They have three grown children.
Jay lives in a rented apartment in a city in Ontario, where he works. Together, they own a house in a nearby town, where Jen lives and works.
"Is it better to pay down the mortgage as fast as possible, or continue to contribute to RRSPs and make extra mortgage payments as we can?" Jay asks in an e-mail. They have a $246,200 mortgage at 2.09 per cent on their $500,000 home. They plan to travel after they have quit working and have a retirement income goal of $80,000 a year after tax.
"Will we be able to retire in two or three years?" Jay asks.
We asked Matthew Ardrey, vice-president of T.E. Wealth in Toronto, to look at Jay and Jen's situation. T.E. is a fee-only financial planning firm.
What the expert says
If they continue with their existing mortgage payments, Jen and Jay will have an outstanding mortgage balance of about $203,000 when they retire in 2018, Mr. Ardrey says. Assuming mortgage rates rise to 5 per cent when their loan comes up for renewal in five years, it will be 2029 before they have the mortgage repaid.
Their lifestyle expenses are about $70,000 a year after subtracting retirement savings, mortgage payments and Jay's rent. Once they retire, they'd like another $10,000 a year for travel until Jay is age 85. These expenses will grow in line with inflation, which Mr. Ardrey assumes will average 2 per cent a year.
Jay is contributing $24,000 a year to his registered retirement savings plan and $6,000 a year to his TFSA, the planner notes. Jay has a surplus of $1,000 a month, which he adds to his emergency fund. Mr. Ardrey assumes Jay's RRSP and TFSA return 5 per cent a year on average.
Jen's only savings are her contributions to her defined-benefit pension plan, which will pay her $68,504 a year at age 60, indexed to inflation, including a bridge benefit of $6,850 a year. Her pension income will drop to $61,654 a year at age 65. She has substantial unused RRSP room. Both Jay and Jen will begin collecting maximum Canada Pension Plan benefits at age 65. In his plan, Mr. Ardrey assumes that the couple's Old Age Security benefits will be clawed back because of their high income, and that they will live to age 90.
Based on his assumptions, Jay and Jen should be able to meet their retirement goal comfortably even with their mortgage payments, Mr. Ardrey says. They could spend $84,600 a year in addition to travel and mortgage payments. Even so, he suggests they focus more on debt repayment, perhaps using the tax refund from Jay's RRSP contribution to make lump-sum mortgage payments. "At a 43-per-cent marginal tax rate, $24,000 in RRSP contributions would generate over a $10,000 refund."
As another option, Jay could use the $30,000 he is saving in his RRSP and TFSA to make extra mortgage payments instead. Even better, he could use the tax refund from his RRSP contribution, plus the money he is now contributing to his TFSA, to pay down the mortgage, Mr. Ardrey says. This latter strategy would allow them to spend $86,800 a year when they retire – $2,200 more than in the previous example.
Because this is a second marriage for both Jay and Jen, they should give some careful thought to estate planning, updating their wills and powers of attorney, the planner says, adding that they should pay close attention to considerations such as how much to leave to each other versus their children, for example. They will also want to "ensure their wills and property ownership are structured in such a way that they do not accidentally disinherit one side of the family or the other."
With their investments, Mr. Ardrey suggests they adjust their asset mix so that it is less risky and better diversified than it is currently. He suggests a mix of 40 per cent fixed income and 60 per cent equities, with the equities divided among Canadian, U.S. and international markets. With retirement just around the corner, "they can ill afford to take a substantial loss in their portfolio."
The people: Jen, 57, and Jay, 59
The problem: How to blend their finances, pay off their mortgage and prepare to retire in two or three years.
The plan: Use tax refund from RRSP contribution, plus money now used for TFSAs, to pay down mortgage more quickly. Review portfolio with a view to reducing risk. Do some careful estate planning.
The payoff: A comfortable and financially secure retirement.
Monthly net income: $13,975
Assets: Bank accounts $38,355; his TFSA $12,040; his RRSP $987,997; her RRSP $4,000; commuted value of her DB pension $610,607; house $500,000. Total: $2.15-million
Monthly disbursements: Mortgage $1,802; Toronto rent $1,297; property tax $315; water, sewer $55; home insurance $95; heat, hydro $270; maintenance $150; garden $25; car lease $395; car insurance $265; fuel $700; oil $20; car maintenance $200; groceries $400; clothing, dry cleaning $110; gifts, charitable $10; vacation, travel $500; other discretionary $1,131; dining, drinks, entertainment $775; grooming $25; clubs membership $55; sports, hobbies $30; pets $15; dentists, drugstore $25; health, life insurance $80; cellphones $100; TV, Internet $190; emergency fund $1,000; RRSP $2,000; TFSAs $500; pension plan $1,440. Total: $13,975
Liabilities: Mortgage $246,200
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