Couple is aggressively trying to pay off mortgage before retirement, but is it too much?

Expert says they should seriously consider downsizing once they retire

Clive* and Juliana are laser-focused on saving for the future. They are living frugally and aggressively paying off their mortgage to make sure they can retire in five years when they both turn 60, at which point they want to enjoy the sacrifices they are making today.

They are pretty sure they will be able to realize this goal, but they also wonder if they’re sacrificing too much today to fund their retirement.

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Ideally, the couple would like a roadmap between now and retirement that outlines how much they should be saving now and where they should be investing. Once they retire, they’ll need to determine the most tax-efficient way to draw income from their savings and ensure they have enough money to see them through their later years.

They each earn about $150,000 a year before tax, with a combined net biweekly pay of $6,200. Each also has an employer’s pension.

Clive works in the telecommunications industry and contributes $300 biweekly (these funds are matched by his employer) to a self-directed, defined-contribution pension returning more than 10 per cent per year. It is currently valued at $550,000. Juliana works in the public sector and contributes $1,200 a month to a defined-benefit pension indexed to inflation that should pay her $5,500 a month if she retires at 60 and $6,000 a month if she retires at 65.

Clive and Juliana have maximized their registered retirement savings plan (RRSP) contributions and have a combined $650,000 invested in balanced mutual funds that return eight per cent per year. Clive actively manages their tax-free savings accounts (TFSAs), which are worth a combined $200,000 and invested in between 50 and 60 stocks across various sectors as well as high-interest savings exchange-traded funds.

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“I have a high risk tolerance, but I’m careful to be diversified, with a mix of higher- and lower-risk investments so that I’m always profitable in some areas even if others are down,” he said.

The strategy is working so far, given that his investments typically return upwards of 15 per cent each year.

The couple also has $95,000 in a joint non-registered account invested in mutual funds and $130,000 in a registered education savings plan for their two children — one will graduate university next year and the other is midway through a degree.

“We’ve likely overfunded their education,” Clive said. “The account will have to be drawn down while they are still in university to avoid any tax penalties.”

Clive and Julia live in the Greater Vancouver area and their biggest expense is their large home, valued at $3.5 million with a $950,000 variable-rate mortgage at 6.3 per cent. This is costing them $2,000 a week in mortgage payments (a $1,500 mandatory payment plus a $500 extra payment towards the principal). They will refinance in three years, which should offer some relief and improve their cash flow. The couple plans to stay here for at least the next five years while their children are still living at home.

They’d also like to travel in retirement while they’re still healthy — Juliana has a chronic condition that may limit travel as they get older — and take extended vacations by the ocean, hopefully with their children and their future families. Clive will continue day trading and likely take on consulting work, while Juliana plans to volunteer and potentially take on part-time work.

“We are consciously sacrificing, not taking vacations, not upgrading our car, to ensure we are in a much better position as we get closer to retirement,” he said. “Have we done the right things? Can we afford to loosen the purse springs a bit? It would be nice to enjoy our late 50s.”

What the expert says

Clive and Juliana’s healthy incomes and well-diversified investments afford them the ability to retire in five years and enjoy life more now until they do. However, unless interest rates substantially decrease over the next five years, they will need to seriously consider downsizing once they retire.

“The ability to travel for the first 10 years of retirement and the whole picture they have for their lifestyle in retirement hinges on their housing situation at retirement,” said Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver. “If their mortgage payments stay the same once they retire, their monthly work pensions would almost cover their current weekly mortgage payments at retirement — not ideal.”

According to Egan’s calculations, at a five per cent rate of return plus ongoing contributions over the next five years, Clive’s pension should grow to about $744,000 at age 60. This will provide an income of $45,000 a year to age 95. Julia’s pension will pay $60,000 a year at age 60, bringing their combined pension income of $105,000 annually, or about $87,000 after tax, not including Canada Pension Plan (CPP) benefits, which they could both elect to receive at age 60, Old Age Security (OAS) or income/capital from their RRSPs, TFSAs and non-registered accounts.

“I would suggest they really look at downsizing at around retirement time to get rid of their mortgage or look at other financing options to lower their mortgage costs or take on a much smaller mortgage with a new home,” Egan said.

His primary piece of advice: Consult a fee-only financial planner to generate retirement projections incorporating their current financial information and objectives using different rates of return, spending/lifestyle expenses and inflation.

“This will lay out the most tax-effective way to draw down their capital to augment their pensions, CPP and OAS and split pensions and registered retirement income fund payments at retirement and beyond,” he said. “The projections will also help determine a good time to downsize from their current house, which could free up some equity to be added to their investment pool.”

Until they speak with a planner and have the projections in hand, Egan said they should not direct any additional payments to their mortgage. Instead, they should enjoy life a bit more now and any surplus savings can go to their TFSAs to increase their financial cushion.

* Names have been changed to protect privacy.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

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