FP Answers: Can I retire in 15 years even if I’m still paying off my mortgage?

There are lifestyle choices you need to make when deciding what to prioritize going forward.

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By Julie Cazzin with Janet Gray

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Q : I am 45 years old, I am self-employed and I earn $125,000 annually. I have $55,000 in a tax-free savings account (TFSA), $250,000 in a registered retirement savings plan (RRSP), and $400,000 in a non-registered investment account. I contribute about $3,000 a month in total to these accounts for retirement. My two-bedroom condo in Hamilton is appraised at $500,000 and I have a mortgage of $222,000 left. I have no other debts. Can I retire at 60 without debt and live comfortably enough? I would like to have a net income of about $50,000 per year. I don’t really want to work until I’m 65, but I will if I have to so I don’t run out of money in retirement. – Robert V.

FP responses : Congratulations Robert for thinking about these questions long before your planned retirement date. This allows you to put strategies in place now and adjust them as needed as you get closer to your goal.

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Right now, you have an after-tax income of about $91,000 a year. Of that amount, you spend $55,000 (including mortgage payments) and put $36,000 into savings. I assume the $125,000 of income is after business deductions and before taxes. If you can keep saving at the same rate for the next 15 years and finish paying off your mortgage during that time, you could add another $540,000 to your total savings.

Let’s start by making a few more assumptions. Suppose you continue to invest in your TFSA at $6,000 per year and in your RRSP at $20,000 per year. Also assume a moderate annual average rate of return of 4.5% on these funds, which is the typical return for a portfolio evenly split between equities and fixed income securities.

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Now assume that you will contribute $10,000 per year to your non-registered investment account for the next 15 years and that this money will be invested entirely in stocks, giving you an average annual rate of return of 6%.

As for your pension rights at age 65, suppose you take Old Age Security (OAS) and it totals $7,384 – the maximum – and Canada Pension Plan (CPP) is the average national of $9,229 per year. Finally, your mortgage of $1,500 per month, with an assumed interest rate of 3.5%, will be paid off at retirement.

Looking at the numbers, you’d have after-tax after-tax spending from age 60 to 95 of $76,000, or $16,000 more than your annual goal of $50,000.

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If you die at age 95, your condo—assuming a 2% annual inflation increase—will be worth almost $1.4 million. By then, all of your investments will have been completely depleted.

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There are other points to consider. First, you could be paying more on your mortgage principal now to allow for early retirement. Check the prepayment conditions with your lender if you are interested in this option. Second, you could reduce the amount of your current savings to allow for increased spending on more discretionary items such as travel, recreation, renovations, etc.

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You may also want to consider that your housing arrangements may change due to your health condition at some point in your retirement. If this happens, you could sell your condo or access the equity to cover these additional expenses through a line of credit or reverse mortgage if necessary.

When making a choice between paying off a mortgage which has a lower interest rate or investing the money at a higher rate of return, it may seem logical to go for the investment option, thinking that your money is better utilized with a higher rate of return. to return to.

But some decisions are also about lifestyle and financial independence, which means early retirement. For example, some people will consider semi-retirement, which includes a part-time job to earn enough money to pay off the remaining mortgage balance. These are lifestyle choices you need to make when deciding what to prioritize going forward.

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As you can see, Robert, there is a fair amount of flexibility in this scenario to allow you to compensate for the natural fluctuation in self-employed earnings if you choose to work less and retire earlier. Knowing this, you may want to think more about whether retiring shortly before age 60 with a part-time job afterwards is an attractive option for you.

Janet Gray is a Certified Financial Planner with Money Coaches Canada in Ottawa.

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