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Early retirement goals come with tradeoffs

Special to the The Globe and Mail – By Dianne Maley

It’s been said that people begin seeking work-life balance in their mid-40s, and so it is with Leif and Sam. Leif, who works in education, is 46. Sam, who works for a non-governmental organization, is 47. Together, they earn $255,000 a year.

Leif and Sam have a daughter, 6, to put through school and a big mortgage to pay off on their B.C. house before they retire. Leif will have a work pension of $61,000 a year at the age of 60, with indexing dependent on the plan’s ability to pay. Sam does not have a pension plan.

“We’re in a pretty common and confusing situation as recent homeowners in [one of] Canada’s hottest real estate markets,” Leif writes in an e-mail. “It is important for us to balance being overly focused on saving for the future and enjoying our current lives, with travel and adventures,” he writes.

“Does it make more sense to save money or pay down the mortgage?”

They’d like to retire in 15 years, ideally with their house paid off and retirement income of $96,000 a year after tax, he adds. “Can we do it?” They’re thinking of shortening the mortgage amortization when it comes up for renewal this spring. Finally, “How can we find investments with reasonable returns that are low carbon and socially and environmentally responsible – and don’t involve individual stock purchasing?”


We asked Ngoc Day, a financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver. Macdonald Shymko is a fee-only financial planning firm. Ms. Day holds both the certified financial planner and registered financial planner designations.

WHAT THE EXPERT SAYS

Leif and Sam are spending $119,300 a year, including mortgage payments but excluding income taxes, payroll deductions and his pension contributions, Ms. Day says. They contribute $2,400 a year to their child’s registered education savings plan and $19,200 a year to their tax-free savings accounts. They have additional saving capacity of $34,800 a year.

In preparing her forecast, Ms. Day assumes a 2-per-cent inflation rate and an average annual rate of return on investments of 5 per cent. Life expectancy is 95. To be conservative, the planner assumes no indexation of Leif’s pension. “Any indexation provided will be an added bonus to their retirement income.”

First, the planner compares investing their savings and paying down the mortgage. At Leif’s 40.7-per-cent marginal tax rate, saving mortgage interest of 2.64 per cent is equivalent to earning a 4.45-per-cent rate of return in a non-registered account, the planner says. If they were to invest their savings in their tax-free savings accounts, for their investment return to beat saving mortgage interest they’d have to take on some market risk, she says.

An “apples to apples” comparison would be the guaranteed saving on mortgage interest of 2.64 per cent compared with five-year guaranteed investment certificates – with a principal guarantee and no volatility – yielding 1.8 per cent. “Overall, it makes sense to accelerate their mortgage pay-down,” Ms. Day says.

“That being said, they could improve their overall tax efficiency by doing both: investing their savings to their RRSPs, then using the tax refund to pay down the mortgage.”

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