Nolan B., 38, and his wife Theresa, 39, live in Saskatoon, Sask. They have a 12-year-old son, Ryan. Nolan earns $95,000 a year (plus a potential 13% bonus if certain performance targets are met) while Theresa earns $57,000 annually. Nolan works as a manager for the federal government while Theresa works for the provincial government of Saskatchewan. “We are aiming to retire at age 56 but with our high mortgage and debt load we aren’t sure we can do it,” says Nolan. “We want to have all our debt paid off by the time we retire.”
What helps is the fact that both Nolan and Theresa have employer pensions. Theresa contributes 7.6% of her salary into her employer-sponsored Public Employee Pension Plan (PEP) and the government matches it with another 7.6% for a total of 15.2% contribution per year. She has $107,934 in the plan as of today. The PEP and the couple’s other savings are mostly invested in mutual funds invested 90% equities and 10% fixed income.
Nolan also has a pension plan with his employer. He contributed to the Sun Life Pension for 10 years until 2013 when he stopped at age 34. “That’s when my employer started offering a Defined Benefit Pension Plan (DBPP) so I joined that in 2013,” says Nolan. “I contribute 9.3% of my salary to the plan each year and it will pay me 40% of the average of my top five years of salary.” The pension also provides for a bridge CPP payment.
But while Nolan and Theresa feel lucky to have these employer pensions, the couple worries because of their huge debt load, which now stands at $406,676 and includes their mortgage at $362,224, a personal loan of $23,528, a Ford F-150 truck loan of $6,924 and an unsecured credit line of $14,000. “We’re worried,” says Nolan. “Our mortgage is on track to be paid off by age 60 but we really want to pay it off by age 56 when we plan to retire,” says Nolan. “How much more should we be paying towards the mortgage to make that happen? Part of me would like to save more now and pay the mortgage later but our goal is really to be mortgage free by retirement so I’d like to be on track for that.”
Nolan has looked at some plans and says he would have to pay $1,400 biweekly to pay off the mortgage in 12 years. “That’s too stringent a plan for us,” says Nolan. “We have a lot of other debt to repay too.”
Right now, the couple is on track to pay off their $6,924 truck loan by 2019 and the $23,528 personal loan by 2020. But they’re only paying the interest of $70 a month on the $14,000 unsecured line of credit and the couple knows that will have to be paid off at some point.
Unfortunately, because of their $406,676 in mortgage and other debt, the couple saves very little money. The amount they do save includes: $2,500 to their 12-year-old son Ryan’s RESP, $25 every two weeks to a vacation fund and $25 every two weeks to Nolan’s RBC RRSP. Nolan also contributes $50 biweekly to a Sun Life Spousal RRSP for Theresa. “Ideally, I’d like to retire at age 56—so in 18 years,” says Nolan. “That’s when I’ll qualify for my maximum DBPP pension.”
But although Nolan’s DBPP would pay him 40% of his final salary annually for life starting at age 56, the rest of their retirement income will have to come from Theresa’s Personal Employer Pension Plan (PEP) as well as from several smaller RRSPs that they’ve accumulated over the years. “We think we’ll need $70,000 gross annually to live comfortably,” says Theresa. “Sure, we have our pensions, but the rest will have to come from our own savings and investments. We don’t have much saved at this point, and I don’t know if we’ll be able to add much over the years with all the debt. But if we can pay off the mortgage and other debt we can save more in RRSPs and TFSAs. That would be a plan we’d be interested in.”
The couple is actively anticipating their retirement. “We plan to do lots of road trips, and we love to renovate our home which we’ll do a lot of,” says Theresa. The couple also loves to run marathons together and enjoys hockey. “We go to all of our son’s league games as well as the odd NHL game,” says Nolan. “Hockey is an expensive sport but I’d like to do more of it when I retire. If we can pay off the mortgage and other debt—and have a modest savings plan in place before then—we’ll be happy.”
Where do they stand?
|Theresa’s Pension cash value (from the previous employer)||$2,903|
|Theresa’s Public Employee Pension (PEP)||$107,934|
|Theresa’s Manulife RRSP||$1,517|
|Theresa’s Sun Life Spousal RRSP||$17,933|
|Theresa’s Royal Bank RRSP||$9,017|
|Nolan’s Saskatchewan pension||$1,262|
|Nolan’s Sun Life RRSP||$3,536|
|Nolan’s Sun Life Gov’t Pension||$129,467|
|Nolan’s Manulife account||$1,026|
|Nolan’s RBC TFSA||$1,187|
|Nolan’s Royal Bank RRSP||$10,985|
|Son Ryan’s RESP – CST||$12,981|
|Son Ryan’s RESP – RBC||$15,749|
|Mortgage (3.476% fixed—term expires May 2019)||$362,224|
|Ford F-150 truck loan (4.99% fixed)||$6,924|
|Personal loan – 5.4% variable (prime + 1.95%)||$23,528|
|Unsecured Credit Line – 6.45% variable (prime + 3%)||$14,000|
Total net Worth (Total assets minus total liabilities): $348,821
What the expert says
“Nolan and Theresa are fortunate in that they both have reliable, steady jobs and a boost on their retirement plan through their employers. However, they are correct to worry about carrying debt into retirement,” says debt specialist Scott Terrio of Hoyes, Michalos and Associates. Here’s Terrio’s advice for the couple.
Seniors are the fastest-growing debt-accumulating Canadians with 12% of all insolvencies filed by seniors 60 and older—and this rate is rising. And the percentage of seniors reporting as ‘debt-free’ has dropped from 72.6% in 1999 to 58% in 2015 (StatsCan). The culprit? Not paying down debt soon enough when they had good earning potential.
Seniors often overestimate their ability to afford their expenses on fixed incomes. They assume universal medical expense coverage when, in fact, many things are not actually covered by government health insurance. And many fail to have sufficient taxes deducted from government pensions because they are used to having been on payroll where taxes were deducted at source. They then end up with tax arrears early in retirement. Add either of these to debt servicing and you can have a recipe for tough cash flow in the golden years.
In Nolan and Theresa’s case, they need to buckle down on repaying their debt load. They are focused on having enough retirement savings but should be focused on their current budget and paying down debt.
While they are considering increasing their mortgage payment, this is not the most effective repayment strategy. Currently, they are making interest-only payments against their $14,000 line of credit. At 6.45% this is the most expensive debt they carry and as interest rates rise this payment will increase since they are not tackling the underlying principle amount. To get out of debt sooner, I recommend that Nolan and Theresa focus first on their highest cost debt, in this case, the unsecured line of credit. Assuming they are not earning more than 6.45% in their RBC and Spousal RRSP, their future personal RRSP contributions would be better shifted to debt repayment.
They should also take a good, hard look at their remaining budget and put every extra dollar they can towards paying off this debt as quickly as they can. Once the line of credit is paid, all previous payments should be funneled into the personal loan, which also carries a high variable rate.
Nolan and Theresa might be able to consolidate their line of credit and personal loan into a lower rate second mortgage, however, this strategy also comes with some risk if they do not stay focused on faster debt repayment. Adding this debt may lower their monthly payment, allowing them to maintain their current lifestyle, but it adds to the interest they will pay in the long run.
Paying down their unsecured debt will, in the long run, free up cash to put into retirement savings by reducing what they are spending on interest. Today Nolan and Theresa are paying roughly $900 a year in interest on their unsecured line of credit alone. Tackling this debt will allow them to redirect this money into their RRSP or mortgage without affecting their lifestyle.
Finally, once Nolan and Theresa have their high-cost debt eliminated, they can then focus on the decision to pay down their mortgage versus saving for retirement. I generally recommend that Canadians focus on debt repayment first. Carrying any kind of debt as you approach retirement is a risk factor. For instance, an illness or disability could sidetrack their plans entirely. Being debt-free provides them with more flexibility than carrying a heavy debt load and is the better way to go.
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