Paying off $163,000 mortgage key to unlocking this Quebec couple’s retirement plan

Situation: Couple with a mortgage, a young child and modest total income wants to plan retirement

Solution: Maintain careful spending, boost education savings and TFSA, forgo RRSP contributions

In Quebec, a couple we’ll call Maryanne, 40, and Albert, 45, have a condo, a mortgage, a five-year-old child, Kim, and a plan. They want to pay off the $163,000 balance of their mortgage within 10 years, finance Kim’s post-secondary education, and then retire by age 65. It’s a common set of goals, but on their combined monthly income of $4,497 — or $4,978 including cash from child support programs — it is a challenge.

 “We have no company pension plans, so we have to build up retirement funds on our own,” says Maryanne, who works in financial administration while Alberta works in broadcasting.

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The couple face an uphill battle to pay the costs of raising their child and saving for retirement in the absence of company DB pension plans. However, their instinct to save, which is apparent in their diligent though modest contributions to monthly savings, can provide for Kim’s education and their own retirements.

Family Finance asked Caroline Nalbantoglu, head of CNal Financial Planning Inc. in Montreal, to work with the couple. “The $481 monthly child support payments are going to decline in mid-2018 when Kim is six. However, with their high savings rate, they can live with a small reduction in benefits. Our problem is to find a way to make that happen.”

Education savings

The couple is putting $160 per month into education savings. That is less than the $208 maximum to qualify for the full Canada Education Savings Grant, which is the lesser of $500 or 20 per cent of contributions. In Quebec, the CESG has a provincial counterpart that adds 10 per cent to contributions. The plans are too good to pass up. If Maryanne and Albert raise their contributions to $2,500 per year and receive $750, net $3,250 per year for their RESP, then with assets growing at 3 per cent a year after inflation, they will have $68,000 in the kitty by the time Kim is 18 and ready for university. That should pay any tuition bill and books in Quebec. If Kim lives at home, it will be enough for a first degree, Nalbantoglu says.

Debt and retirement

Accelerating mortgage payments is important to the couple. Their basic payment at their 2.65 per cent rate is about $650 per month. They have increased it to $1,100 per month. If they use available monthly uncommitted savings, they can raise the payment to $1,550 per month and have it discharged within 10 years when Maryanne is 50, the planner estimates.

The couple’s RRSPs, with a current balance of $42,367 for Albert and $26,500 for Maryanne, are growing at $2,400 per year. They put just $50 each month into each of their TFSAs. They can add $2,500 to $3,000 to their RRSPs each year, but in view of their relatively low marginal tax rate, about 28 per cent, it is more efficient to add to their TFSAs. Moreover, if they want to retire abroad, as Maryanne would like, they would have to pay 25 per cent withholding tax on RRSP payments versus zero on TFSA withdrawals. Only if one earns more than $46,000 would it be wise to give RRSPs a higher priority than TFSAs, the planner notes.

Using the estimated time to mortgage elimination, 10 years, there will be at least another $1,100 per month which can be saved beginning in 2028. That surplus can go to their TFSA accounts which currently have a balance of $6,724. In 10 years, the balance will have risen to $23,205. After their mortgage is paid off, they will generate $13,200 additional annual savings on top of present TFSA savings of $1,200 per year. That’s a total of $14,400 that can go to TFSAs to fill space. By 2038, when Albert is 65 and Maryanne is 60, the TFSA balance will, with the same assumptions, have risen to $201,200. That sum, paid out like an annuity to exhaust all capital and income for 35 years to Maryanne’s age 95 would generate $9,360 per year.

RRSP contributions are not tax-efficient at the couple’s present income level. We’ll assume that each forgoes present monthly $100 RRSP contributions and adds the $200 sum to their general budget. With that assumption, Albert’s RRSP balance, now $26,491, in 20 years at age 65 based on just 3 per cent annual growth after inflation would be $47,845. With the same assumptions, Maryanne’s RRSP with a current balance of $42,367, would be $76,520. That’s a total of $124,365. If each person’s RRSP balance at Albert’s age 65 and Maryanne’s 60 is annuitized to expend all income and capital in 35 years to Maryanne’s age 95, they would have $5,790 per year of pension income.

At retirement, when each is 65, their incomes will be $9,360 from their TFSAs, $5,790 from their RRSPs, Quebec Pension Plan payments of $9,600 per year for Albert and $7,417 for Maryanne, Old Age Security of $6,156 per year for Maryanne based on 35 years residence in Canada after age 18 and $7,040 for Albert, all in 2018 dollars. There would be no tax on TFSA payouts and tax would be negligible on the remaining income. They would have $3,780 per month to spend compared to future projected expenses of less than $3,000 per month after elimination of accelerated mortgage expense, child care, RRSP and TFSA savings.

The projections assume inflation stays at 3 per cent, that property taxes and condo fees will not rise faster than inflation, and that present costs for food and clothing will not increase very much. Elimination of their mortgage in ten years will allow some of their present or recommended mortgage payments to be available for costs that Kim will generate as a teenager. That would cut their projected retirement income surplus, Nalbantoglu cautions.

“What makes these projections work is the very frugal way Maryanne and Albert live and the surplus the end of their mortgage will create in a decade when Kim is 15,” Nalbantoglu says. “The numbers show that Maryanne and Albert can have a very comfortable retirement if they maintain their modest way of life for another two decades. “

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Retirement stars:  three retirement stars ***out of five