Skip to main content
financial facelift

Sandra, who is 50 years old and single, would like to retire at the age of 60.

She would seem to be well on the way. Her gross annual income from employment is $150,000. She also has $295,000 in a registered retirement savings plan and $100,000 in non-registered investments.

However, the mortgage on her principal residence is $447,000 and she is concerned about paying it off before she retires. Her house has a market value of $900,000.

Furthermore, she is carrying most of the payments on her parent's $182,000 mortgage. Their residence is valued at $300,000.

With net income of about $9,500 per month from her job, Sandra enjoys a lot of cash flow. However, her earnings are commission-based and variable, which makes it hard to plan for paying down a mortgage in lump sums.

She has no employer pension plan. But she does have critical-illness insurance, which ends at retirement.

We invited Barbara Garbens of Toronto-based B. L. Garbens Associates Inc. to take a look at Sandra's situation.

What the expert says

"Since she is single and must rely on herself for her future well-being, she has to continue saving for retirement - especially since she will not have a pension," Ms. Garbens observes. "Sandra only has about 10 years to go before her desired retirement date so she has to start building up capital while the earning potential is there."

Sandra's monthly expenses are close to $6,500 (before income taxes), so she has a surplus that can be put aside. Ms. Garbens recommends that it be used to maximize contributions to Sandra's registered retirement savings plan and tax-free savings account - then allocate the remaining surplus toward paying down the mortgage (on top of regular payments).

As Sandra's pay is variable, she may earn more than $150,000 in some years. "I would direct as much of any additional cash that she has from her earnings toward the mortgage on her principal residence," Ms. Garbens suggests.

The $100,000 in non-registered investments could be applied toward the mortgage on Sandra's house. The stock portfolio worth $25,000 could be transferred without delay while the $75,000 in a real estate investment could be transferred when it matures in a year.

"There is a guaranteed rate of return in paying down the mortgage with this money," notes Ms. Garbens. "The rate on the principal residence mortgage is 5 per cent and Sandra would have to earn almost 10 per cent pretax … in order to be better off by not paying the mortgage."

Sandra has suggested that her siblings should assume a share of the mortgage payments on their parents' house. Perhaps this avenue is worth exploring as a means to freeing up more of Sandra's funds.

The parents are between 75 and 80 years old. When they pass on, it will be possible to sell the property, and Sandra's share of the proceeds could be added to her retirement fund. In the meantime, payment frequency on the mortgage could be increased to weekly to pay it off faster.

As for her own residence, Sandra may be able to wind up the mortgage within 10 years if she earns more than anticipated over that time frame. This is a possibility since her pay is commission-based and variable.

But if "she finds that she simply cannot throw more toward the mortgage, I would suggest downsizing at some point," says Ms. Garbens.

On the question of early retirement, "I believe that Sandra may be [overly] optimistic about working only for another 10 years or so given the level of debt that she currently has - unless she can earn more than she anticipates over the next 10 years," concludes Ms. Garbens. "She may need to retire later, at 65, in order to ensure a comfortable retirement."

Ms. Garbens estimates Sandra would need $1.5-million (in registered plans and non-registered accounts) to retire at 65, given she maintains her current level of spending and downsizes her principal residence by 77. She would need $1.35-million to retire at 60 if she became mortgage-free beforehand by downsizing to a less expensive residence.

Lastly, Ms. Garbens recommends that Sandra find a good adviser who can manage her growing pot of money. "She is a busy person and may not have the time required to pay attention to the details and make moves when the timing is right."



CLIENT SITUATION

The Person

Sandra, 50, single, with dependent parents

The Problem

Paying off mortgage debt and laying the foundation for a comfortable retirement

The Plan

Maximize RRSPs and TFSAs, direct savings and extra commission income toward mortgage, apply non-registered investments to mortgage, sell second property after parents no longer need it, downsize principal residence.

The Payoff

A comfortable, debt-free retirement starting at 65 - if not as early as 60.

Monthly net income

(commission-based): $9,500

Assets

RRSP $295,000; stock portfolio $25,000; real estate investment $75,000; residence $900,000; 2nd property $300,000; car $35,000; total $1.63-million. Pension: none

Monthly disbursements

Property tax, house insurance $475; utilities $245; phone, cable, Internet $237; maintenance $100; cleaning $125; food $500; clothing $150; transportation $575; vacation $835; entertainment $250; education, hobbies $100; insurance $302; medical, drugs, dental $42; donations $100; mortgage $2,000; loan payments $450. Total expenses $6,486; surplus $3,000

Liabilities

Mortgage on principal residence $447,000; mortgage on second property $182,000.

Total: $629,000



Special to The Globe and Mail

Want a free financial facelift? E-mail finfacelift@gmail.com

Interact with The Globe