Does the $1,400 in expenses currently include:
- Home maintenance costs? (e.g.: 1% of the value of your home each year) What have you fixed in the last 5 years?
- Car maintenance costs? (a typical car costs ~ $8k / year according to AAA, that’s a lot more than the $265 / month)
- All of the insurances you require?
- Budget for time with a fitness or health professional?
- Money for your hobbies?
- Money spent on travel?
- Money for time with friends?

I think that the consensus on paying off the mortgage is correct. You can likely “retire” sometime around 55-58.But I think that there are lots of other things to consider.

For example: you’re single. Most people are not intent on being single from 50 to 85. Does your current budget give you enough money to spend time with friends or prospective partners? I have a couple of family members who hooked-up with new partners in their 50s. One got married. As older couples, they really revel in trips and fine dining. But if you’re not doing those things right now, you’ll have to find that room in the budget.

You’re going to retire with 20+ years to live, maybe even 30 (say you live to 85). In big ticket terms that’s 3 cars, 3 sets of carpets, 2 interior paint jobs, 30 sets of x-mas gifts, kids (and / or grand-kids) going to University. It’s a long time.

I have a few retired government workers in the family all in their 50s. One hit the “magic number of 85 on his 55th birthday. He took his pension and started doing side gigs in manual labor. A few months here and there. Mostly to keep himself busy, but he derives an income from these as well. Another moved into “semi-retirement” to just work less and now she’s off to travel and teach English in South America. Another just moved from full-time teaching into part-time teaching. She loves teaching adults, so she just does night courses and gets to travel on the usual school breaks.

My point here, is that what’s far important than paying off the mortgage or really digging into the “can I retire?” question, is the “what is my retirement?” question.

Now we can answer the “can I” question. That’s easy. Pay down the mortgage and start collecting a pension. You’ll have enough to eat, clothe and house you until you die. There are millions of Canadians living on less than 2.5k / month.

The bigger question is really “do you want to live on 2.5k / month until you die?”

Calculation of reduction to federal public servant pension at age 65 due to bridging termination is: .007 x # years of contributory service X average max pensionable earnings for the year of retirement (max $42,500 but use average salary if less than this) = reduction. Example (all in 2009 dollars for illustration purposes) if you had 35 years service and qualify for maximum CPP: .007 x 35 years service X $42,500 = $10,412.50 reduction to federal service pension at age 65. The maximum CPP pension is $10,905 at age 65 in 2009 dollars. So if you wait until age 65 the decrease to your federal pension is about the same as the CPP pension you will start receiving – you just start getting this from two sources (fed pension and CPP) instead of one (fed pension).

Now lets see how that compares to the CPP benefits you would get if you elected to take CPP earlier:

Age 60
Penalty of 30% for taking it early (0.5% x 60 months early)
Annual CPP payments $7633.50
Total payments received prior to age 65 are $38,167.20
Age where reduction in CPP benefits equals $38,167 is 77 years old

Age 62
Penalty of 18% (0.5% x 36 months early)
Annual CPP payments $8942.10
Total payments received prior to age 65 are $26,826.12
Age where reduction in CPP benefits equals $26,826 is 79 years old

[Note - the gov't is raising the penalty for early CPP with higher rates transitioning in starting in 2012. Not a huge hit in my opinion, especially when you factor in the reduced taxes because of the reduced pension received.]

You can use your own figures and dates and even get your own quote from HRDC to decide what makes sense to you. For me, I’d rather have the money sooner than later to enjoy, invest, whatever. Plus, who knows what the future brings in terms of life expectancy. I’ve already had one major illness.

Cheers!

(She) you should try to have no mortgage in your retirement years.

Pay-off the house and pay-off the car.
Any money after that should be put into a TFSA so income/interest earned is tax-free. Contributions to the RRSP would be my last choice; pay/contribute only enough to off-set an income tax payments to the Feds :)

Given her salary and some frugality, she will be more than fine.

After you retire, immediately start withdrawing the RRSP and start putting it into a TFSA. You want to have completly converted it over before you turn 65. Otherwise you miss out on tons of nice government programs. Spreading it out from 56-65 should mean it won’t increase your tax bracket any.

But… paying the mortgage first yields a guaranteed 5.4% tax-free return without risk. I don’t think you could get that kind of deal from other investments.

Dan.

I feel that over time my house would apperiate in value, and by the time I’m ready to retire I would not need a big house to live in, so I would downsize to a condo. After selling my house I would pay off the remaining balance and move into a smaller townhouse or condo without a mortgage.

I’m 27 and own two properties (One primary and one rental) in Vancouver, and if you look at the real estate market it’s nearly impossible to purchase a house in the lower mainland. Currently I’m only making minium payments on both properties but at the same time I’m building equitly and If/when I sell I will walk away mortage free.

I would like to hear your thoughts on my approch?

I would imagine in PEI there isn’t as large a disparity between homes near the ‘big’ cities and in the far off suburbs as we see in other provinces. When my dad retired, they moved to an area that provided everything they needed within walking distance. Being positioned close to work was no longer a requirement.

But, the change in housing would have to be signficant because you would have to pay legal fees, commission to sell the house, moving costs, perhaps new window coverings, lights, etc.

I bring this up because a recent article in the Globe suggested to a single retiree that this was her best option in order to make it through retirement successfully. She was not in as good a position as Kayla, however.

Even with a defined benefit plan pension, if you have room to top up on your RRSP you should consider maxing this amount out. The income tax implications can be a huge benefit now, especially if you have reached a higher tax bracket. This is because you will have tax free gains within the account while you wait to reach retirement and a further tax savings as you likely move into a lower tax bracket once you actually do retire.

A home mortgage is good debt as it is cheap money. As long as you can create a return greater than the mortgage rate you are better off through simple leverage. Although most people are concerned about debt, you need to understand the basic implications of opportunity costs and time values of money. Also, don’t forget about your ability to write off interest from you mortgage against your tax return; this is a benefit in retirement as well.

Kayla may want to take a look at our RRSP vs. TFSA guide which is a series of 3 simple questions that will tell you which account is more beneficial for you.

Not wishing to hijack this thread, as an aside related to the above comment about CPP “bridging” (please explain this term), I’m thinking about taking CPP at age 60. I believe the pension reduction at age 65 will be equal to the amount CPP would have been had I waited until age 65 to start it. I believe this just means I’m drawing CPP earlier, being under the impression this is basically a zero sum game i.e., take more earlier, get less later. Right?

I agree with FT that your mortgage debt should be your #1 priority. Paying off that mortgage before you retire will buy you a lot of financial freedom in your retirement years. If you can, pay it off in 5 years but if it means working a few extra years, it will be well worth it.

I’ve been working with someone in a very similar situation to yours. With her husband gone and her kids moved out, she took in a couple of student borders. She was able to use the $600 a month (two borders at $300 a month each. – They bought their own food) and apply it towards her mortgage.

I also second the point about part time work. If you are a teacher, supply teaching or tutoring is a great way to ease into retirement both financially and psychologically.

All the best and thanks for being willing to share so openly with thousands of online readers.

She could move her car loan to the HELOC and then borrow against her HELOC to “double-up” on her mortage to pay it down without penalty, while using the “redirected’ $110.00 [her current contribution to RRSP] to service her HELOC along with her current “car payment”.

But she will have to be cautious because interest rates [while they will probably remain for another year or so] could rise.

If age 55 is a deal-breaker, what about picking up some part time work after retirement? Based on the numbers, I wonder if Kayla is a teacher. In which case, supply teaching may be a great way to earn a bit of income on the side until she pays off her debt. (If she isn’t a teacher, maybe part time freelance work or consulting?)