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Couple hopes to keep early retirement plans despite job loss

Peter Power/The Globe and Mail

Illness recently forced Alicia to give up her $120,000 a year job. Now, she and her husband, Ryan, are worried about how this might affect their plans to pay off the mortgage on their Toronto condo and save for their old age.

They wonder whether they can still maintain their lifestyle if Ryan retires from the working world at the age of 50, as they had planned. Ryan is 43, Alicia 48.

Ryan brings in $210,000 a year working in information technology. As well, they have a second condo that they rent out.

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"Can we pay the mortgage debt of $347,000 in five years and still carry our current lifestyle?" Ryan asks in an e-mail.

"Or does Alicia have to get a part-time job with an income of $30,000 a year to help us achieve this goal?"

They had hoped to have $75,000 a year after tax when they retired.

To offset the loss of income, they are considering selling their current residence and moving to the smaller condo in five years. They figure they could live off the income from the sale proceeds, which they estimate at 7 to 9 per cent a year.

"Is that realistic?" Ryan asks. They wonder where they might be able to cut expenses without compromising their lifestyle too much.

In addition to their winter getaway, they travel abroad each year to visit relatives.

We asked Marc Henein, an investment adviser at ScotiaMcLeod in Mississauga, to look at Alicia and Ryan's situation.

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What the expert says

At the rate they are paying now, Alicia and Ryan will have paid off the mortgages on both of their properties in about 13 years, Mr. Henein says.

To pay it off in five years, a monthly mortgage payment of $6,300 would be required, compared to the $2,800 a month they are paying now, he notes. That is likely more than they can afford.

"Perhaps a better alternative would be to line up the mortgage being paid off with Ryan's target retirement date of age 50, which would be 2021," Mr. Henein says. This would require a mortgage payment of about $5,270 a month for six years.

To achieve even this more modest goal, Alicia would have to go back to work and earn at least $42,000 a year after tax, the adviser says. This is more than she figures she can make.

The planner looks at two alternatives, one, they keep both condos, and two, they downsize to the smaller one. If they could hold on to both properties and be debt free by 2021, the $28,000 of annual rental income from the second condo would be a significant part of their retirement income, Mr. Henein says. At age 65, they would begin collecting Canada Pension Plan benefits, and at age 67, Old Age Security. This would add another $28,000. (The amount is reduced because the couple moved to Canada in the late 1990s.)

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Their registered retirement savings plans (now about $440,000) should be enough to bridge the gap.

"If Ryan is able to maximize his contributions over the next five years, it will add roughly $125,000 to their savings," the adviser says. Hence, based on a 5-per-cent annual growth projection, their RRSPs should be about $700,000 by Ryan's age 50, generating income of $35,000 a year, Mr. Henein says. All three income sources add up to $91,000 before tax or about $75,000 after tax, he says.

Because their two main goals are paying off the mortgage and saving for retirement, Mr. Henein suggests Ryan and Alicia redirect the money they are contributing to their tax-free savings accounts to the mortgage payments or Ryan's RRSP. The couple's plan to generate income of 7 to 9 per cent a year from the proceeds of their condo sale is not realistic, the adviser says. At best, they can expect to make 4 per cent or 5 per cent a year.

In the second alternative, Ryan and Alicia downsize their home, moving to the smaller condo and selling the larger one, either when Ryan retires or even earlier. If Alicia is unable to find work for $30,000 a year, for example, "I would suggest looking at downsizing their lifestyle now so they can have a lower debt load and continue to maximize their retirement savings," he says. The equity from the sale of the larger property would go a long way to mitigating risks to their retirement income goals.

***

Client Situation:

The people: Ryan, 43, and Alicia, 48

The problem: Loss of Alicia's income is putting their retirement spending goals at risk.

The plan: Alicia goes back to work to help pay off the mortgages. If she cannot, then sell the larger condo and move to the smaller one, investing the sale proceeds.

The payoff: A more modest, but more secure, retirement.

Monthly net income: $13,348

Assets: Cash $4,000; stocks $30,000; his TFSA $13,000; her TFSA $17,000; his RRSP $161,645; her RRSP $278,300; residence $900,000; rental condo $510,000. Total: $1.9-million

Monthly disbursements: Mortgage payments $2,800; property tax $650; insurance $135; condo fees (utilities, maintenance) $1,500; cleaning $220; auto lease $750; other transportation $244; groceries $1,200; clothing, dry cleaning $230; gifts, charity $195; travel $500; other $50; entertainment $550; child support $500; other discretionary $120; drugstore $30; life insurance $78; telecom $205; RRSPs $2,000; TFSAs $1,500. Total: $13,457

Liabilities: Home mortgage $52,000; rental mortgage $295,000. Total: $347,000

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com. Some details may be changed to protect the privacy of the persons profiled.

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