This Ontario couple needs to get their debt under control to enjoy a carefree retirement 

They bought investment house at too high a price and took out loan to get into cryptocurrencies, only to see shares slump

In Ontario, a couple we’ll call Hank, 55, and Judy, 56, have built their lives with a lot of assets — and a lot of debt. They take home $11,463 per month from their jobs, his with a transportation company, hers with a petrochemical firm. They’ve lived in Canada for 20 years, raised two children to their mid-20s. Now they want to plot their retirement in 10 years.

Their problem is the debt. They must slash it if they want afford to move to someplace warm year-round for their retirement.


They have loans of $789,200 including a home mortgage of $452,000, a mortgage on a rental unit for $225,000, $12,000 for RRSP loans, an unsecured $35,000 line of credit, and $48,200 for car loans. Their $1,955,000 of assets less $789,200 liabilities leaves them with net worth of $1,165,800.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Hank and Judy. His plan — make their portfolio more tax efficient, cut risk and redirect savings to get to a goal of $80,000 in after-tax retirement income (or between $100,000 and $110,000 before taxes).

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Hank and Judy want to use that money to spend $15,000 on vacations in southern climes, provide $40,000 for their children’s two weddings, and have $50,000 to renovate their rental for their own use as a retirement home.

Inefficient investments

In 2003, Hank and Judy purchased an investment house with a plan to let it appreciate. But they bought at a high price only to see prices fall, so they kept it and rented it out for $1,400 per month. Then they invested in cryptocurrencies with a $35,000 loan and watched as shares rose to $140,000 and then slumped to $80,000.

Debt rationalization is in order, Moran suggests. Set up a home equity line of credit and use it to pay off other debts such as $17,000 of student loans they co-signed with a 6.5 per cent interest rate. They should be able to roll their $452,000 home mortgage with a 2.89 per cent interest rate into a new mortgage with a 1.2 per cent mortgage which, with the HELOC, would be $469,000. This refinancing would have $1,550 charges per month including principal repayment. They are paying $2,890 for their home mortgage and student loans, so this move would save them $1,340 per month. That cash could be used to pay off their unsecured $35,000 line of credit.

Cutting interest charges on their home would make it more affordable as a retirement residence, Moran points out. Selling the rental is the way to do it. The current estimated price, $550,000, less the $225,000 mortgage, leaves equity of $325,000. They paid $210,000 for it. It has a $225,000 mortgage at 2.87 per cent. After 5 per cent primping and selling costs, they would have $522,500 when sold. Take off the cost and they would be left with a $312,500 capital gain, half taxable, net $156,250. It’s jointly owned, so each partner would have to report a capital gain of $78,125. Their tax on the transaction at a marginal rate of 45 per cent would be $70,313, leaving them with about $227,000, after repaying the mortgage. Their current yield on their $325,000 equity based on net rent after costs of $11,257 is about two per cent, too little for a leveraged investment. It should be sold.

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Debt reduction

That sum could pay off their $12,000 RRSP loan and the rest used to pay down the mortgage on their home.

This path of debt reduction with a 10-year paydown period and the present interest rate of 2.89 per cent would cut payments by $600-$800 per month.

The RRSP loan would be history, freeing up $200 per month. That $2,400 per year could go to RRSPs, avoiding the need to borrow for contributions in future, Morn notes. It’s an important saving.

Present expenses exceed income by $1,065 per month. They finance the shortfall with ever more loans, so interest rate cuts as discussed are vital, Moran explains. Sale of the rental and resulting cost reductions will make their retirement secure.

Retirement income

At 65, Hank and Judy can expect 90 per cent of the maximum Canada Pension Plan benefit, currently $14,110 per year. That’s $12,700 per year each. Hank will have been resident in Canada for 40 years so he will get the current maximum OAS, $7,370 per year. Judy will have been resident one year less, so she will receive 39/40ths of that amount, $7,186 per year.

The couple’s RRSPs total $304,0000 and they add $3,075 per month. In 10 years with a three per cent return after inflation, the accounts would have a value of $831,568 and then support payments of $47,755 for the following 25 years.

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Their $131,000 of TFSAs are growing with $12,000 annual contributions at three per cent after inflation. If TFSA capital with those additions grows for a decade, the accounts will have $313,620. Spent over the following 25 years, the TFSAs would support payouts of $18,010 per year.

Adding up retirement income sources, compressing their ages by a few months for simplicity to 65 each, they would have $21,600 pension income, $25,400 CPP cash flow, $14,556 OAS income, $47,755 RRSP income, and $18,010 TFSA cash flow for total income before tax of $127,321. With TFSA cash flow removed, incomes split and taxed at an average rate of 16 per cent, then with TFSA cash flow added back, they would have permanent retirement income of $9,150 per month. That’s $109,800 per year after tax. They would be over their target spending of $80,000 annual retirement income after tax and the surplus would allow them their travel and gifts to their children, Moran concludes.

Investing in the fashion of the moment assets has risks. Adding leverage to risk can make an asset unsuitable for retirement when there is limited time to recover. Wisdom in middle age often means investing for income, not price speculation.

Retirement stars: 3 *** out of 5
Financial Post
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