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Karen and Garth.Lucy Lu/The Globe and Mail

Five years into their retirement, Garth and Karen are wondering how long they can maintain their lifestyle without having to sell their house. He is age 69 and worked in health care, she is 65 and worked in education. They have five adult children between them, one of whom they’re currently helping out with rent.

“We are a retired couple, married three years, living in Toronto,” Karen writes in an e-mail. For income they use Canada Pension Plan, Old Age Security, Karen’s pension, RRIF withdrawals and line of credit funds. During their working years, they both had good incomes. Garth has $1.2-million in his registered retired income fund, and their jointly owned home is valued at $3-million. Karen’s work pension pays $55,380 a year, indexed to inflation.

They are concerned because their mortgage is coming up for renewal this year, giving them the opportunity to consolidate some or all of their debt.

“With line of credit rates on the increase, we wonder if we should combine the lines of credit with the mortgage at renewal time, use funds from the RRIF to completely pay off the mortgage and the line of credit, or sell the house,” Karen writes.

“We had hoped to stay in the house for another five-plus years and use the funds from its sale later in life,” she adds. “Can we afford to stay put and get rid of the nagging worry that we won’t have enough money to live long lives and ideally leave some funds for our children?” Their monthly outlays are $15,455 or $185,460 a year.

“We have a lot of worth on paper, yet we feel the need to constantly monitor the investment accounts and wonder how worried we should be.”

We asked Matthew Sears, a vice-president and certified financial planner at T.E. Wealth in Toronto, to look at Garth and Karen’s situation. Mr. Sears also holds the chartered financial analyst designation.

What the expert says

Mr. Sears suggests they start by paying off the smaller of the two credit lines ($16,000) with an interest rate of 7.05 per cent. Alternatively, they could roll it into the mortgage at renewal. The other line of credit – $325,000 at 2.95 per cent – has a lower rate than their existing mortgage. So depending on what rate they renew the mortgage at, they could roll the LOC in or leave it as is.

As it is, they are paying only interest on the LOCs. “If they roll them into the mortgage, they would have to start paying down the principal balance as well,” the planner says.

Of the options Garth and Karen outline, withdrawing money from Garth’s RRIF to pay off their credit lines would be the least practical because it “would cost a lot of money in taxes,” Mr. Sears says. Garth is withdrawing $120,000 a year from his RRIF. “To net the $341,000 to pay off the credit lines would require him to take out an additional $680,000 from the RRIF account.” (Income of more than $220,000 would put Garth in the top 53.53 per cent tax bracket.) They could use the tax-free savings account funds for part of the repayment, but it would still require an extra withdrawal of $535,000, the planner says.

Whether Karen and Garth can afford to remain in their home for another five or 10 years depends on what they do with their current debt and their appetite to carry debt further into retirement, Mr. Sears says. He looked at a few alternatives based on a rate of return on their investments of 5 per cent a year, inflation of 2 per cent and lifestyle expenses of $146,280 a year, excluding debt payments. When the house is sold and they’ve downsized to a smaller property, it’s assumed $1.5-million minus any remaining debt would be added to their retirement portfolio.

In the first scenario, they roll the smaller LOC into the mortgage and continue paying interest only on the larger one. In scenario two, they renew the mortgage and withdraw from the RRIF to pay off the larger LOC. In three, they renew the mortgage and pay off the LOC with TFSA and RRIF withdrawals. In the fourth scenario, they roll the LOCs into the mortgage and pay the whole amount off over eight years. Mr. Sears concludes the best option would be the last one – to consolidate all of their debt into a mortgage and pay it off over the following eight years.

“All of the scenarios result in Karen (who is the younger of the two) reaching age 94 with investment assets remaining,” Mr. Sears says. She runs out of investments at 95. In all of the scenarios, they retain their downsized property, which could be used to fund shortfalls. If the rate of return is 4 per cent rather than 5 per cent, Karen would run out of investment assets at the age of 92. “In all of the scenarios, they would be able to stay in their house for the next five years,” Mr. Sears says. In scenarios one and four, they are able to keep their house longer: nine years in scenario one and eight years in scenario four, the planner says.

Should they worry about their investments?

“The portfolio does make up a significant source of their cash flow for the next five to eight years until they sell the house and invest the proceeds,” Mr. Sears says. They are drawing about 8.6 per cent of the portfolio’s value each year. “Even when they do add back some of the house proceeds, they are going to be drawing about 6.5 per cent of the value of the portfolio in the initial year,” rising steadily thereafter.

“For example, in 2031, with inflation, they have expenses of $178,373 plus income tax of $30,000, so they will need about $208,000,” he says. CPP, OAS and Karen’s pension cover about $115,000, so $93,000 will have to be withdrawn from the portfolio, which by then will include proceeds from the house sale. “It will be important for them to monitor the portfolio throughout retirement.”

Low interest rates make it difficult to generate the required rate of return without including stocks – hence risk – in the mix, the planner says. Garth’s portfolio is about 60-per-cent fixed income and 40-per-cent stocks. Karen’s RRSP is 35-per-cent fixed income and her TFSA 15-per-cent fixed income. It will be important for them to maintain a balanced portfolio that can withstand the occasional 20-per-cent to 30-per-cent drop in stock markets so they do not have to sell at a low point to cover their living expenses.

“In times of rising stock markets, they would be drawing their needs from equities and if the market dropped, they would be able to draw from fixed-income or cash.”

Client situation

The people: Garth, 69, Karen, 65, and their children

The problem: Should they roll their credit lines into the mortgage when it comes up for renewal this year? How much longer can they afford to stay in their house?

The plan: Weigh the alternatives. Depending on what rate they can renew their mortgage at, it may make the most sense to roll in the credit lines and plan to pay the whole amount off over eight years.

The payoff: They’ll still have to monitor their investments closely but they can rest assured they can keep their house for a few more years.

Monthly net income: $15,455

Assets: Cash $1,000; her TFSA $82,000; her RRSP $108,000; his RRIF $1.2-million; estimated present value of her DB pension plan $1,072,325; residence $3-million. Total: $5.46-million

Monthly outlays: Mortgage $2,065; property tax $1,050; home insurance $450; utilities $570; maintenance, garden $500; car lease $560; other transportation $700; groceries $1,400; adult child’s rent (partial) $1,000; clothing $120; line of credit $1,200; gifts, charity $475; vacation, travel $1,000; dining, drinks, entertainment $750; personal care $150; club memberships $630; golf $210; sports, hobbies $280; subscriptions, other $185; health care $440; health insurance $30; life insurance $1,000; phones, TV, internet $440; her health insurance $250. Total $15,455

Liabilities: Mortgage $167,500; line of credit $325,000; second LOC $16,000. Total: $508,500

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Some details may be changed to protect the privacy of the persons profiled.

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