Joanne’s focus on paying down her mortgage has meant she’s paused building savings and just about everything else
Published Aug 16, 2023 • 5 minute read
Joanne has been aggressively working to pay off her mortgage and outpace rate increases. Photo by Chloe Cushman/Financial Post illustration files At age 53, Joanne* finds herself at a crossroads as she plans for the future. She and her entrepreneur husband of more than 20 years divorced in 2022, so she is adjusting to life on a single income with two children — a tweener and young adult — as she lays the foundation for her next chapter.
While Joanne has built a successful career in the transportation industry and earns an annual income of $128,000, managing cash flows on one income has been stressful.
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. Article content During the course of their marriage, she and her ex-husband purchased three homes together and paid off each. After the divorce, Joanne purchased her current home, valued at $508,000.
“To find myself at 51 years old with a 20-year mortgage freaked me out,” she said.
Joanne took a variable-rate mortgage of $317,000 at 1.2 per cent because she knew she had the capacity to aggressively pay it off and outpace rate increases, which is what she has done to this point.
From the first payment on, she has doubled her biweekly payments to $1,368.84. She has also drawn on her tax-free savings account (TFSA) and invested in short-term (between 90 days and 1.5 years) guaranteed investment certificates to fund the additional lump sum payments of 10 per cent (or $31,000) she is allowed to annually make on the mortgage.
This has allowed Joanne to build up more than 50-per-cent equity in her home. If she continues at this breakneck pace, she could have the remainder of the mortgage, $219,000, paid off by the time it’s up for renewal in 2026. But with the interest rate now at 5.45 per cent, she isn’t sure she can continue to be as aggressive. She’s also no longer convinced it’s the best way forward.
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Article content While she’s been working with a financial planner for close to 20 years, her focus to pay down the mortgage has meant she put a pause on building up savings and just about everything else.
“I’d like to take a vacation at some point,” she said.
Joanne also wants to grow her TFSA and use that money to fund a new car in five to seven years and for any emergencies that may come up.
I’d like to take a vacation at some point
Joanne
She has a life insurance policy through her employer that will cover three years’ income in the event of her death. She also has a term insurance policy valued at $325,000 that will pay $200,000 directly to her ex-husband should she die while her kids are considered children for child support purposes. The policy expires in two years. She and her ex have built up almost $125,000 in a registered education savings plan for their children.
Joanne has saved more than $470,000 in registered retirement savings plans (RRSPs) and has a defined-benefit pension from her employer that is indexed to inflation and will pay out a little less than $30,000 a year beginning in 2029.
“My adviser has told me you will never get a pension like this again. Keep it. Don’t touch it,” she said.
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Joanne also anticipates she will earn maximum Canada Pension Plan benefits when she retires, which she plans to do at age 65 when her youngest child will be completing university.
A moderate-risk investor, Joanne maximized her RRSP and TFSA contributions prior to her divorce. Now, she contributes to her RRSP when she has a surplus and when she receives her annual bonus (typically between $9,000 and $14,000). She has monthly expenses of about $6,000.
“My goal is to retire debt free,” she said. “Once my children have grown and flown, I intend to downsize and travel more. Based on my lifestyle, I can be very comfortable on $6,000 per month as long as I have no debt.”
Q-and-A with the experts Q: Is Joanne too focused on paying off debt? How does she stop focusing on her debt and look at the bigger picture?
A: Both Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, and Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management in Vancouver, said a comprehensive retirement plan running different scenarios over time is key. This will provide important insights and reduce anxiety about the future. They also both agree Joanne is right to focus on paying off her debt, but have different approaches to get there.
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“Given the hike in her variable-rate mortgage and her reluctance as a conservative-to-moderate-risk investor to expose her money to more market volatility, she should remain as aggressive as possible and use the GICs and even the cash just sitting in the TFSA account to continue with the accelerated mortgage payments,” Einarson said.
Egan recommends Joanne aim to be mortgage free by age 65, which would give her a longer runway to pay off the mortgage and free up cash flow to enjoy her life.
“She should continue to do the biweekly payments of $1,368.84, but I would advise her not to use her TFSA to do the annual lump sum payments going forward,” he said. “She should continue directing her annual bonus to her RRSP and she could use the tax refund towards a lump sum mortgage payment each year.”
Q: Is it possible for Joanne to retire at 60 and still be in a position to financially help her children if needed?
A: “If she retires at age 60, her pension from work would pay her $29,942 per year, her RRSP could provide $32,542 with the assumption of a net average growth rate of three per cent and CPP would add $10,032. These sources give Joanne a total net income of $58,738 per year or $4,895 per month,” Einarson said.
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Article content Five extra years without asset withdrawals and with savings will tip Joanne from a doable retirement to a dream retirement scenario
Eliott Einarson
“She could likely live off this income if debt free at 60, but it would not give her the retirement she is dreaming of or the flexibility to help her children if needed. In addition, she would be missing out on five critical years where she can allocate what is going towards her mortgage now to TFSAs and other savings for the future. Five extra years without asset withdrawals and with savings will tip Joanne from a doable retirement to a dream retirement scenario.”
Q: Should Joanne renew her term life insurance policy?
A: “Given her work group life insurance and assets, she should not renew the policy and instead put that payment towards her retirement savings,” Einarson said.
Q: When should Joanne start taking CPP and Old Age Security (OAS) payments?
A: Both Einarson and Egan agree she should take CPP and OAS at age 65 as this will increase income security long-term.
Q: Should she leave the defined-pension plan alone or cash it in? What are the estate implications?
A: “Joanne should leave her defined-benefit pension alone,” Egan said. “It has indexation features that would complement her market-focused RRSP and TFSA accounts when she retires.”
Einarson points out the pension is not an estate asset.
54-year-old’s retirement plan needs finessing Costly divorce leaves woman wondering if she can ever retire Looking for the right strategy to draw down retirement income “Generally, after a guarantee period of five to 10 years of payments, any residual pension remains with the pension,” he said.
* Names have been changed to protect privacy.
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