The final sprint before stress-free retirement


By putting more of his disposable income into paying off his mortgage sooner, Yves can keep the funds in his TFSA to pay for future expenses.

Financial analysis by Angela Iermieri | Financial Planner | Desjardins Group

Yves wants to retire in 2 years. He and his spouse, Carole, want their monthly income to be $7,500 net (roughly $120,000 gross a year).

Will they have enough time to reach their retirement goal? 

Financial situation
Yves, 68 years old, part-time consultant
Gross annual employment income for the next 2 years: $50,000
Canada Pension Plan: $10,500
Old Age Security pension: $6,500
Former employer's pension plan: $28,000
Gross retirement income (excluding employment income): $45,000

Carole, 66 years old, public service retiree
Employer's pension plan: $37,000
Canada Pension Plan: $6,500
Old Age Security pension: $6,500
Gross retirement income: $50,000

Savings
RRSP: $400,000
TFSA: $50,000

Debt
Mortgage loan: $50,000
Monthly payment: $400
Rate: 2.30%

Their joint retirement income is $95,000. To reach their goal of $120,000 gross per year, they're short $25,000. The couple can make a yearly withdrawal from their investments to reach their goal of $90,000 net--or $7,500 a month.

Minimizing their tax bill: What they can do now
Given that they're both over 65 years old, they can split their income. They can lower both their tax rates by splitting the following incomes when they file their tax return: 
  • Government pensions 
  • Employer pension plan 
  • RRIF withdrawals 
The amount they save on their taxes will help them avoid dipping into their investments and, by extension, allow their assets to grow a little longer.

When the RRSP will be converted to a RRIF
When Yves begins to withdraw funds from his RRSP or, at the latest, when he turns 71, he'll have to convert his RRSP to a RRIF. To cover the shortfall, he can withdraw the missing gross annual amount of $25,000 (indexed at 2% yearly) until he turns 88 (when the RRSP will run out).   

RRIFs are flexible enough so that Yves and Carole can change the amount of their withdrawals every year based on their needs, as long as they withdraw the required minimum annual amount. 

That means they can withdraw smaller amounts in the years that their expenses are lower and hold onto their investments after Yves turns 88.

Paying off the mortgage loan with the TFSA or not?
To determine whether it's better to continue growing their TFSA savings or to use it to pay off their mortgage, we need to compare the TFSA's expected rate of return (non-taxable income) to the mortgage percentage rate. 

In this particular case, the mortgage rate is 2.30% and the TFSA's average potential rate of return is 5%. So it's in his best interest to make the most of the TFSA's rate as long as possible.

Considering that Yves wants to continue working as a consultant for at least another 2 years, he can put an extra portion of his employment income into paying off their mortgage faster. 

Their mortgage agreement allows them to pay off an additional yearly amount of up to 15% of the initial amount they borrowed ($100,000) and/or increase their monthly payments by twice the amount.

If they use either option (or both) over the next 2 years, Yves and Carole can significantly decrease their financial obligations for when Yves retires. 

A concrete example
Annual lump-sum of $10,000 on the mortgage
+
$600 monthly payments, up from $400
=
$50,000 paid in full before full retirement at the end of 2018

By putting more of his disposable income into paying off his mortgage sooner, Yves can keep the funds in his TFSA to pay for future expenses such as a trip or a new car.  

What's more, he'll have a greater amount saved so that if unexpected expenses do arise in the future, he won't have to dip into his RRSP savings and risk increasing his tax bill.  

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