Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission for purchases made through links on this page.
In Ontario, a woman we’ll call Ella, 51, is raising two children, ages 12 and 13. A sales representative for a company that manufactures building materials, Ella brings home $8,000 per month plus an average bonus of $2,500 per month after taxes. She also receives $500 per month in child support payments per child, for a total of $11,500 per month after taxes.
She has a $1.5 million home and investment assets totaling $1,305,174, including a life insurance policy with a cash surrender value of $40,000. After debt, including the mortgage on her home of $544,561, her net worth is $2,300,613. She would like to have $55,000 per year after taxes in retirement.
Email firstname.lastname@example.org for a free analysis of Family Finances.
Comfortable now, Ella worries that she could be caught in a bind when interest rates rise.
You don’t have to pay off your mortgage for 18 years, well into retirement, and if the current interest rate of 1.79 percent rises as expected, that could take even longer.
If your mortgage rate doubled, your monthly payment of $2,990 would increase to $3,429. That would be 43 percent of your basic monthly income of $8,000. He worries that his debt may be difficult to cover.
Family Finance asked Derek Moran, director of Smarter Financial Planning Ltd. in Kelowna, BC, to work with Ella.
Pay the mortgate
She has options to improve her retirement security.
He has $536,374 in cash that he could use to pay off most of the mortgage very soon, though that payment could incur a hefty penalty, Moran says. Instead, he could perform the familiar maneuver of paying off the loan up to the penalty-free annual prepayment limit, $110,000 in his case, and then borrowing that amount to invest. It would reduce the mortgage while maintaining the same level of investment income, plus the interest on the loan would now be tax deductible.
There is some risk if the assets you buy fail, but if you invest conservatively, doing it just once would reduce your payback period to 14 years, Moran explains. That would leave her mortgage-free at age 65. You need to be mortgage-free at age 60, so you need to make an additional $130,000 lump sum. Assuming you make the move, payments of $240,000 would reduce your cash to $296,374.
When Ella turns 60, her children will be 21 and 22, but will start post-secondary education while still living at home. She puts $208 a month into a RESP account, $2,500 a year, and adds the Canada Education Savings Grant, which equals $500 or 20 percent of contributions, whichever is less, subject to a lifetime maximum of $7,200 for each beneficiary. Her ex-husband makes the same contributions. The RESP has $164,000 now and will easily add another $50,000 per child with contributions and growth. Therefore, there is no problem with the costs of post-secondary education for children, says Moran.
She was not a resident of Canada for 15 years after age 18, so her CPP may be only $7,225 per year at age 65, Moran estimates. At age 65, she will be 47 minus 15 of the 40 years required to get full benefits. That’s 32/40 or 80 percent of the current OAS maximum benefit, $7,707 or $6,166 per year.
Ella’s TFSA contribution limit is $60,000, adjusted for residence outside of Canada. She doesn’t have TFSA now. She has the money to fill her space and she should, advises Moran. If she then adds $6,000 per year for nine years, she will become $141,070 at age 60 and then make $6,988 tax-free for the next 30 years to age 90.
Ella’s RRSPs total $564,800. If she adds $25,000 of her cash plus $25,000 per year of nine years’ earnings, and the balance grows at six percent per year minus three percent expected inflation, it will convert to $998,533 at age 60 in 2022 dollars, and then generate an income stream of $49,461 before taxes over the next 30 years up to 90 years.
If Ella makes these assignments, she should have $221,374 left over. If that balance is invested in a taxable account and grows at the assumed three percent, it will become $288,843 at age 60. That sum would generate taxable income of $14,307 over 30 years to age 90.
From ages 60 to 65, assuming Ella has quit her job, child support payments are finished, and she has no income from work, her income would be $49,461 from her RRSP, $6,988 from her TFSA, and $14,307 from unearned income. registered. Investment income. That’s a total of $70,756. After taxes at an average rate of 18 percent on everything but TFSA cash flow, she would have $58,660 per year or $4,888 per month to spend. With the elimination of $2,990 in monthly mortgage payments and all debt payments, her expenses would drop to $3,719 per month.
At age 65, Ella could add $7,225 CPP and $6,166 OAS for a total income of $84,147. After a 19 percent tax on all but $6,988 of TFSA cash flow, she would have $70,261 per year to spend per year, or $5,855 per month.
Inflation and your mortgage interest payable could increase. That might take a few years to happen in an inflationary environment, but the higher debt service charges would be lower on a lower outstanding mortgage balance that she could renegotiate or shop among lenders. Time would mitigate this interest rate.
Finally, in serious cost-cutting, perhaps due to illness, Ella could downsize her $1.5 million home to $1.425 million after five percent of selling costs, then purchase a home in the range of $1 million and reap the difference. $425,000 invested at three percent after inflation would earn $12,750 per year indefinitely.
“Rarely is a retirement plan bulletproof, but this one comes close,” Moran explains.
Retirement Stars: 5 ***** out of 5
Email email@example.com for a free family finance analysis.