Q: My wife and I have been married for 14 years (my first wife passed away). Janie is not working outside the house.
Here is our financial situation:
Walter: age 63, still working full time
Janie: age 55
Salary: $150,000 annually
Benefits, but no pension plan (never had one)
Own our home: $250,000 mortgage, house value $850,000
Walt RRSP: $350,000
Janie RRSP: $100,000
As well, I receive $525 monthly survivor from CPP. We have about $10,000 in savings and another $6,000 in a TFSA. Other expenses are typical: car loans with monthly payments, taxes, utilities, but no other real debt. Kids are gone, and no one on the payroll!
I may be forced into a “retirement” position in April of 2017 as my current contract expires with the company I work for and the indication is that we will not be renewing the agreement. If I cannot find suitable replacement work between now and then (difficult to find a “career” at age 63), I may choose to retire.
Can I retire based on the information I have offered?
A: I’m going to try to do some retirement modelling for you, Walter, given the information you’ve provided. I’ll have to make some assumptions along the way.
First, I’ll assume your mortgage amortization is 11 years and that you and Janie bought the house and got your mortgage 14 years ago when you got married on a 25-year amortization. I’ll assume a 3% interest rate now and a 5% rate starting five years from now.
I’ll further assume that you will be entitled to a full CPP retirement pension (combined with your survivor pension) and that Janie receives 50% of the maximum based on her previous working years. I’ll also assume that you have both lived in Canada for most of your adult years and will qualify for full OAS pensions.
Finally, I’ll assume inflation of 2% and an investment return of 4.5%.
Assuming you pay off your mortgage over the next 11 years, Walter, I figure you can comfortably spend $36,000 per year or $3,000 per month, indexed at 2%, every year from now until your age 100 (Janie’s age 92). This scenario would leave you with a modest RRSP/RRIF balance and 100% equity in your home in 37 years. To me, this is an extremely conservative target but provides a baseline.
Given you have been living off of a $150,000 salary and a $6,000 CPP survivor benefit—about $100,000 after tax net of your estimated benefit costs—I’m guessing you may be spending much more than $36,000 per year currently. Your estimated $100,000 after-tax income is going towards an estimated $27,000 of mortgage payments and I suspect some of the remaining $73,000 is going towards RRSP contributions, but a $36,000 budget might mean a significant drop in your standard of living.
If you were comfortable maintaining some debt throughout your retirement and converted your mortgage to an interest-only line of credit, you may be able to increase your spending by a few hundred dollars per month, Walter, but nothing significant. It brings down your monthly debt service costs from day one, but you pay more and you pay for longer.
A 50% downsize in your home might help and would probably give you another $1,500 a month for your budget and push your sustainable spending up 50% to $4,500 per month or $54,000 a year.
As you can well imagine, there are any number of scenarios that you can model depending on some part-time work, a higher rate of return on your investments or personal factors like an expected inheritance.
Anyone can retire at any age, Walter. It’s just a matter of whether or not you can live comfortably based on your existing financial resources.
Many Canadians can live comfortably off of $36,000 per year. I think this is pretty sustainable in your case without using your home equity. But if your goal for a retirement budget is anywhere close to the estimated $73,000 disposable income you currently have net of mortgage payments, I think some combination of working longer, higher investment returns or home equity may be required to achieve your financial goals.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.