Can Bianca afford to retire at 66 with a mortgage?

Bianca* is 65, enjoys her job and knows her employer would love her to stay as long as possible. However, she turns 66 at the end of this year and thinks this might be the right time to retire – if her investment portfolio can generate $6,000 a year in after-tax dollars.

Is this a pipe dream? Would she be better off working an additional year or two, especially given the

high cost of living

and the fact she has a mortgage?

Bianca was mortgage-free until she recently purchased her $800,000 forever home in Ontario to be closer to her daughter. She is making accelerated payments of $2,564 a month at 4.59 per cent on her $232,000 mortgage, which matures in nine years. While Bianca says having a mortgage at this stage in life is not ideal, it is manageable on her annual income of $140,000 before tax. Her current total monthly expenses are about $5,200.

Each year Bianca contributes 10 per cent of her base salary and her employer contributes three per cent to a registered retirement savings plan (

RRSP

) that is now worth $825,000 and is invested in bank stocks. The employer portion of the savings plan — $164,000 — is locked in.

When she retires, Bianca plans to direct 50 per cent of those locked-in funds into a life income fund (LIF) and 50 per cent to her RRSP, which she will convert to a registered retirement income fund (

RRIF

) when she turns 71.

If she does retire at 66, she will also receive an employer pension of $46,000 a year before tax (the pension is not indexed to inflation) and is eligible to receive $1,377 a month in Canada Pension Plan (CPP) payments.

She has delayed CPP and Old Age Security (

OAS

) because she is still working, and wonders when she should start drawing both government benefits to avoid facing any recovery tax or clawback.

“I do not have any plans for what I will do in

retirement

and I know that is not a good thing. I think it’s why I keep working,” said Bianca. “My expenses are likely to stay similar to what they are now. I don’t see anything changing. Will I be able to maintain a comfortable retirement if I retire at the end of this year?”

What the expert says

“Bianca is asking the right questions and has the right concerns. The effects of inflation over the next 30 years will be significant and since almost half her gross retirement income is from a defined benefit pension that has no indexing, she needs to be confident the other sources of income can bridge this future gap,” said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management.

“A retirement plan will integrate inflation and taxes into all assumptions to determine what’s possible given what’s available. Without a plan you really enter retirement blind. Often, people neglect to withdraw adequately from their registered assets for retirement income, which can create tax problems in the future for themselves and the estate.”

The good news is Bianca’s investment portfolio combined with her pension and government benefits will more than meet her income needs after tax. Right now 40 per cent of her income needs are tied to the mortgage. At her current accelerated payment rate, Einarson estimated this will be eliminated about 10 years post retirement, providing increased flexibility and more future savings power — likely double the income she needs in her mid 70s and beyond.

Einarson said that, rather than deferring additional registered income to age 71 and then withdrawing the minimum, she should strategically draw down enough registered assets in addition to other income sources to meet her total income goal of $6,000 net per month and maximize TFSA contributions. “Why wait until age 71? She can benefit now from more income. Once the mortgage is paid she will have more than enough income.”

As for CPP and OAS, Einarson said if she does retire at 66 she can start her benefits then and should not be in danger of the clawback on OAS if the income from the RRIF is managed well.

Bianca should consider making changes to her portfolio construction to determine if it is appropriate for her future needs, Einarson said. “If it is all invested in bank stocks, she may want to look at diversifying both geographically and by industry. Canadian bank stocks offer good dividends but investing in only one industry is a major investment mistake.”

She may want to consider engaging a firm with a tailored portfolio management approach if she doesn’t want to assume the responsibilities of managing her retirement income portfolio when she leaves her employer’s plan, Einarson said.

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“A good firm will also provide the retirement income planning up front and updates to the plan as her life circumstances evolve,” he said. “Engaging in retirement planning is going to help Bianca clarify her future and her idea of retirement, while also building confidence. Her biggest risk now might be not taking advantage of her financial position and enjoying these early retirement years.”

*Name changed to protect privacy.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll 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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