63-year-old wonders if she can retire with $100,000 debt

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Can I still retire with debt? This is not a question Vanessa, a lifelong saver, would have anticipated asking at age 63, but, a legal issue two years ago has left her with a $100,000 home equity loan and she’s worried.

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Up until then, her plan was to retire this year. She owns a home in Ontario valued at $600,000, a personal registered retirement savings plan (RRSP) worth $404,000 invested in conservative mutual funds, and she’s been contributing to her employer’s defined contribution pension plan and group RRSP, which combined are currently valued at $604,000. “I’ve focused on maximizing my RRSPs each year. Once I start drawing that money down, I plan to prioritize my tax-free savings plan (TFSA), which currently has $63,800 in cash.”

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Vanessa is paying 5.29 per cent interest on the loan, which costs her $700 a month (her total monthly expenses are about $3,000). The loan matures in 2027. She plans to use her annual bonus ($10,000) to pay down the loan but wants to know if there is more she can be doing. Or whether she could carry this debt into retirement.

Vanessa earns $122,000 a year before tax. Ideally, she would like to retire this year but she is thinking she’ll likely continue to age 65 because of the loan. Even when she does retire from her full-time job, she plans to continue working part-time, hopefully in a role that is more enjoyable, to cover monthly expenses and help her meet her retirement cash flow target of $70,000 a year before tax. Using a bank simulator, she expects her combined registered investments will provide $58,000 in annual income. “Does this target income seem reasonable?” she asked.

Vanessa plans to stay in her current home for as long as possible and may take an annual trip, but otherwise anticipates her lifestyle costs will be similar to what they are today. She also wonders when she should apply for Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

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“I think I’m doing okay in terms of what I’ve saved, but I’m worried about carrying $100,000 in debt when I retire,” she said. “How do I eliminate that in the best way possible? Do I need to work two more years? Am I in a good situation with the actions I’ve taken so far?”

What the expert says

“Vanessa is a great saver and has set herself up for a successful retirement with a million-dollar RRSP. Her combination of a strong saving discipline and ability to live well within her means has ensured her a successful path forward,” said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management.

“The current worry about debt and retirement will be solved with comprehensive retirement income planning. A retirement plan will bring the clarity needed for her to retire with confidence. A good planner will walk you through multiple scenarios, such as spending more in the early and most active years. A preliminary running of Vanessa’s numbers shows that she can spend more in retirement than she is spending now. Seeing her income options in a plan will demonstrate that she does not have to worry and can enjoy retirement spending more than planned.”

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Einarson recommends Vanessa request retirement planning from her current mutual fund provider or look for an independent firm for comparative planning and a second opinion on how her investments are structured as she approaches drawing income. “Flexibility and a customized strategy are going to be paramount to support her future needs and ensure the plan is implemented properly,” he said. “At her asset level, she can graduate out of mutual funds and have an independent firm with a portfolio manager work together with the financial planner to ensure her needs are met on an ongoing basis in a more tailored approach.”

When it comes to when Vanessa should retire, Einarson said it’s important to do what she’s comfortable with. Given her worry about entering retirement with debt, she may want to wait a couple of years and retire at 65 when she is debt-free and able to more fully enjoy retirement.

“She can use her cash on hand, annual bonus and RRSP refund to pay off her debt over the next couple of years. This will also give her the advantage of time, growing her other assets and seeking out retirement planning before entering retirement.”

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As it stands, Einarson said Vanessa has enough registered assets to combine with future CPP and OAS payments to meet her income needs comfortably throughout retirement, even with an average return three per cent net of inflation on her more conservative investments.

“In fact, she can replace more income than she currently lives on into her late 90s. Vanessa is looking for a cash flow target of $70,000 a year before tax, knowing her registered investments will provide almost $60,000 and her CPP and OAS will more than make up the difference; she will easily hit that target,” he said.

“What will be more meaningful as part of the planning process, would be to take a close look at her after-tax spending and design her income for that future income need. This would also be more efficient as retirement planning software will integrate the changing tax situation of someone living through retirement, with particular asset types, and in their province. The CPP and OAS will be integrated into this approach and the ideal time to elect those benefits will be demonstrated. For Vanessa, age 65 would be a good balance of taking government benefits when needed, but without any needless reductions.”

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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).

* Names have been changed to protect privacy.

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