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

Posted on by Duane Roberts

Pension Real Estate Personal Finance Mortgages

There are lifestyle choices to make when deciding what to prioritize in the future

Publication date:

Jan 28, 2022 • Jan 28, 2022 • 4 minute reading • 10 Responses When deciding between paying off a mortgage with a lower interest rate or investing the money at a higher return, it may seem logical to go for the investment option. When deciding between paying off a mortgage with a lower interest rate or investing the money at a higher return, it may seem logical to go for the investment option. Photo by Getty Images/iStockphoto Files

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By Julie Cazzin with Janet Gray

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Q: I am 45 years old, self-employed and earn $125,000 a year. I have $55,000 in a tax-exempt savings account (TFSA), $250,000 in a registered retirement savings plan (RRSP), and $400,000 in an unregistered investment account. I contribute a total of about $3,000 per month to these retirement accounts. My two-bedroom apartment in Hamilton is valued at $500,000 and I still have a $222,000 mortgage. I have no other debts. Can I retire debt-free and live fairly comfortably at age 60? 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 if I have to I will so I don’t run out of money when I retire. – Robert V.

FP answers: Congratulations Robert for considering these questions well in advance of your scheduled retirement date. Because of this, you can now enter strategies and adjust as needed as you get closer to your goal.

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At this point, you have an after-tax income of approximately $91,000 per year. Of that, you spend $55,000 (including mortgage payments) and save $36,000. I’m assuming the $125,000 in income is after business deductions and before taxes. If you can keep saving at the same rate for the next 15 years and pay off your mortgage during that time, you can contribute another $540,000 to your total savings.

Let’s start with a few other assumptions. Let’s assume you continue to invest in your TFSA at a rate of $6,000 per year and with your RRSP at $20,000 per year. Let’s also assume an average annual average return of 4.5 percent on those funds, which is the typical return for a portfolio that is evenly split between stocks and fixed income.

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Let’s now further assume that you will contribute $10,000 annually to your unregistered investment account for the next 15 years and that money will be fully invested in stocks, which will give you an annual average return of six percent.

As for your retirement benefits at age 65, let’s say you take Old Age Security (OAS) and will total $7,384 – the maximum – and Canada Pension Plan (CPP) the national average of $9,229 per year. Finally, your $1,500-a-month mortgage, with an assumed interest rate of 3.5 percent, will be paid off by retiring.

If you cut the numbers, you show that from 60 to 95 years of age you would have sustainable after-tax expenses of $76,000, which is $16,000 more than your $50,000 annual goal.

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If you die at age 95, your apartment — assuming a two percent annual inflation rate — will be worth nearly $1.4 million. At that time, all your investments are fully depreciated.

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There are some other points to consider. First, you can now pay off more on your mortgage principal in order to retire early. Check the prepayment terms with your lender if you are interested in pursuing this option. Second, you can reduce the amount of your current savings to allow for more spending on more discretionary things, such as travel, hobbies, renovations, etc.

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You can also keep in mind that your living situation may change at some point during your retirement as a result of your health situation. If this happens, you can sell your apartment or access equity to cover those extra costs through a line of credit or a reverse mortgage if necessary.

When deciding between paying off a mortgage at a lower interest rate or investing the money at a higher rate of return, it may seem logical to go for the investment option, as you believe your money will be better spent with a higher return. yield.

But some decisions are also about lifestyle and financial independence, so retire early. For example, some people will consider partial retirement, which includes a part-time job to earn enough money to pay off the remaining mortgage balance. These are lifestyle choices to make when deciding what to prioritize in the future.

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As you can see, Robert, there is a fair amount of flexibility in this scenario to allow you to offset the natural fluctuation in self-employment income if you choose to work less and retire early. Knowing this, you may want to think more about whether retiring a little before 60 with some part-time work afterward is an attractive option for you.

Janet Gray is a certified financial planner at Money Coaches Canada in Ottawa.

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