Q. My wife and I are 45 years old, and we would like to stop working at age 55. Can you help us assess if that is attainable?
We owe $525,000 on our mortgage and our home is valued at $1.2 million. We currently pay a mortgage of $1,845 biweekly at an interest rate of 2.99% (30-year amortization). We hope to pay off the home within 10 years, with extra payments of $20,000 per year. We plan to live in this home and potentially sell it if we cannot live there anymore due to health issues.
Right now, we have $560,000 in Registered Retirement Savings Plans (RRSPs), $20,000 in a Locked-In Retirement Account (LIRA), $22,000 in Tax-Free Savings Accounts (TFSAs), and $10,000 in non-registered shares. We contribute $50,000 per year to our investments. We also each have a defined benefit pension plan, but will lose quite a bit if we retire at 55, which we are aiming to do. At 55, we will receive $20,000 per year each. The pension is not indexed to inflation and there is no bridge benefit. We have both worked full time in Canada since we were 22 years old and are eligible for Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
We believe we will need a net income of $4,500 to $5,500 per month to have the comfortable retirement we want. Given our savings and investments, does it look like we can do it?
A. Congratulations, Howie and Pamela. You are definitely on track to meet your goal of retiring together at age 55.
If you continue to make an additional $20,000 in mortgage payments each year, as you plan to do, the mortgage at the current interest rate should be paid off by the time you are 53 or so. This is, of course, dependent on mortgage rates staying stable and not increasing much during that time.
Your plan also gives you both a couple of additional years to add more money to your savings and investments on top of the $50,000 per year you are already adding now and plan to continue until age 55. If your investments are able to earn a 4% overall annual return from now to age 55, your ongoing income to age 100 would be about $68,000 after tax per year, or about $5,667 monthly.
In my analysis, I assumed that you would both start drawing your CPP at age 60 and your OAS at age 65. If you delayed taking either or both of these, you would receive a larger benefit but would need to rely on your savings until the benefits start to make up the gap.
Your home will be your largest asset in retirement, and when you sell it, you will have a large amount to either invest or to use to fund your lifestyle expenses. If those expenses are expected to be less than $5,667 monthly as noted above, you may be able to retire earlier than age 55. Now is a good time to take a closer look at your current expenses and compare that number to what your retirement expenses would be. For instance, if your property taxes are about $12,000 annually ($1,000 monthly), does that leave enough money to cover all other retirement expenses including costs that occur irregularly, such as home or car repairs?
I suggest “test driving” your retirement and trying to live for a few months on the net income you are budgeting for. Keep in mind that you would no longer have to make mortgage payments or save for retirement once you actually leave the workforce. So try to live on $5,667, as projected here and see if that amount will work for you.
The good news is that you have enough time over the next 10 years to make any adjustments needed.
Janet Gray is a fee-for-service financial planner and money coach in Ottawa.
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