Moira's goal is to save as much money as possible and helping to pay her daughter’s university tuition while being able to take a family vacation each year.Christopher Katsarov/The Globe and Mail
Moira, 51, is a teacher who earns $117,450 a year plus another $5,000 annually tutoring during the summer. She has “no debts except for my remaining mortgage,” Moira writes in an e-mail. Her house in the Greater Toronto Area is valued at $1.4-million.
She has an 18 year-old daughter starting university this fall. Moira plans to rent out her spare room to an acquaintance for $700 a month for the next year or so.
“How can I realistically build wealth in the last seven to 10 years of my career while paying off the remainder of my mortgage?” Moira asks. The outstanding mortgage principal is about $175,000.
Her goals include saving as much money as possible, helping to pay her daughter’s university tuition and taking a family vacation each year.
As a teacher, Moira has a defined benefit pension plan, indexed, that will pay $63,000 a year from age 58 to 65 and $55,000 a year thereafter.
“Will I be able to retire comfortably, or do I need to work past 2031, when I will be 58?” she asks. Moira is unsure how much she will need to live on after she leaves the work force, but she hopes to maintain her standard of living.
We asked Steve Bridge, an advice-only certified financial planner with Money Coaches Canada, to look at Moira’s situation.
What the Expert Says
Moira has strong goals, which means she is likely willing to change her behaviour and make choices that align with what she wants to accomplish, Mr. Bridge says.
She asks how to pay off her mortgage by her target retirement date of 2031. “The simple answer is to increase her payments from $570 biweekly to $1,220 biweekly,” the planner says. He assumes Moira renews her mortgage at 5 per cent when it comes due in March, 2026.
That’s up from 1.63 per cent now.
“If Moira has any extra money, I suggest contributing to her RRSP because she is in a higher tax bracket now than she will be in retirement,” Mr. Bridge says – at least in the early years before she takes Canada Pension Plan and Old Age Security benefits.
“Unless she is confident in her ability to invest independently, I recommend using a robo-adviser for the investing piece,” he says.
“If she wants to increase her savings and how much goes to her mortgage, she could review her spending and see if there is anything she could cut back on,” he adds. “Or, she may want to increase her tutoring side gig.”
Moira’s strongest goal is to be financially independent by 2031, Mr. Bridge says. So how can she get there? “First, let’s figure out her spending needs in retirement.” She is spending $6,080 per month now, which includes saving in her tax-free savings account and the mortgage payments, but her needs are about $3,846 per month, or $46,152 annually. “On the face of it, her defined benefit pension will cover this and she’s all set,” the planner says.
However, there are a few pieces that are missing. One is that her budget for home maintenance, upgrades, repairs and renovations is too low at $2,400 a year. “A rule of thumb that I use is 1 per cent of the home’s value on average per year, so on a $1.4-million home, this would be $14,000 per year,” he says. “This doesn’t mean she will spend that amount every year, but amortized over five to 10 years, it is wise to incorporate this so that a large repair bill or renovation does not catch you out.”
He also adds an annual amount to her travel budget, which stands at $3,600 a year. Moira has mentioned she wants to take a family vacation every year, which can cost as little or as much as she wants to spend. “Let’s increase this to $10,000, on average, per year.”
Her car maintenance budget was a bit low, so the planner has increased that to $1,200 a year, including occasional new tires, brake jobs, major tune-ups, etc.
Health care costs in retirement will likely go up from what they are now and include her insurance premiums – estimated at $3,000 a year – plus out-of-pocket expenses, which can range between $2,000 and $6,000, depending on the person. “How much Moira actually spends will, of course, vary, but I would estimate her ideal retirement spending goal at around $72,000 a year after tax,” Mr. Bridge says.
Moira wants to assist her daughter with her university tuition. She has already saved $42,000 in a registered education savings plan. Her daughter will be starting school in September. Depending on factors such as the school, the program and living arrangements, costs for an undergraduate degree can range from $15,000 to $35,000 a year, the planner says. Another consideration is whether her daughter will work during the summer.
If additional funds are needed, student loans are an option. “My advice is to ensure your own financial security before stretching yourself to support adult children,” Mr. Bridge says.
Moira has a cash flow surplus of about $7,000 a year, which can go to her RRSP, the planner says. This, combined with her pension, savings, CPP and OAS, will give her estimated sustainable spending of about $51,000 a year after tax from age 58 to 95. This is based on taking CPP and OAS at age 65, living to age 95 and a 5.4-per-cent rate of return. “This is enough to meet her retirement spending needs but may be a little short of her ideal retirement,” he says.
To increase retirement spending, she can downsize her home, work longer or work part-time past age 58, and increase her savings between now and 2031. “Downsizing her home in 2031 to one worth $800,000 in today’s dollars is projected to give her $77,500 in after-tax spending, which may be the simplest solution,” Mr. Bridge says.
Or she could contribute to her RRSP starting now, pay down her mortgage with any surplus cash flow, and consider working a bit longer or working part-time past 2031 to increase her income, the planner says.
Moira should revisit the timing of CPP and OAS benefits closer to when she is 65, but “I would not advise taking them before then unless she has a shortened life expectancy,” he says. “Delaying these to age 70 may also make sense.”
Client Situation
The person: Moira, age 51, and her daughter, 18.
The problem: How can she pay off her mortgage before she retires and still add to her savings?
The plan: Up the mortgage payments, contribute more to her RRSP and consider working a bit longer, or working part-time after she retires.
The payoff: A better understanding of the tradeoffs and possibilities.
Monthly net income: $7,500.
Assets: Tax-free savings account $10,000; registered education savings plan $42,000; residence $1,400,000. Total: $1.45-million.
Commuted value of her DB pension (provided by Moira): $640,000. This is the amount she would receive as a lump sum if she retired now.
Monthly outlays: Mortgage $1,235; property tax $565; home insurance $100; electricity $150; heating $150; maintenance $200; car insurance $290; other transportation $300; groceries $750; clothing $200; gifts, charity $140; vacation, travel $300; personal care $150; club memberships $100; dining out $250; drugstore $20; life insurance $30; phones, TV, internet $150; TFSA $1,000. Total: $6,080.
Liabilities: Mortgage $175,000 at 1.63 per cent.
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Some details may be changed to protect the privacy of the persons profiled.
