# Looking for opinions on an upcoming decision



## Bananatron (Jan 18, 2021)

Greetings, a brief introduction:

I'm (H) 41 and so is my wife (W). 2 kids, aged 8 and 10. We live in Alberta.

Combined net income is right around $120,000 a year after taxes. I have been tracking our spending and saving the past 5 or so years and find that between putting money towards RESPs, mortgage payoff, and general investing, we live off about $80,000 net per year as a family. This covers our basic expenses such as food/utilities as well as one or two vacations a year as well as some expenditures such as purchasing an RV and or upgrading vehicles.

We are quite content with this lifestyle. We paid off our house in 2018 and have been investing since.

Just recently I took a look at our finances to see if we are on track for retirement. As I mentioned earlier we have been saving/investing roughly $40,000 per year.

*My registered accounts:*
DC pension balance: $410,000
Personal RRSP balance: $60,000
TFSA: $65,000
DB pension at age 55: $45,000/year (indexed)

*Wife's registered accounts:*
Personal RRSP: $45,000
Spousal RRSP: $94,000
TFSA: 0

*RESP Balance*: $62,000 (maxxed for current year) with plans to continue topping up till the $7200 is reached for each child. This will either pay for my kids education or if we are able to help them out while we are still working it can go towards down payments on a home or similar. Bottom line is this is not our money, we're not planning on spending it, it is all going to the kids.

*Assets:

Primary residence:* estimated listing price $750,000. Worst case scenario if selling after commission $650,000 in pocket. No mortgage on property.
*Rental Property:* Currently treading water, slowly paying down principal and trying to get ahead of depreciation. Estimated value $310,000. Rent covers Insurance, Taxes, Insurance, HELOC interest and Mortgage payment, no more. (Yes this was a mistake)
*Vehicles:* Primary vehicle ($15,000), Commuter car ($5000), RV ($25,000) - No loans on any.

*Liabilities:*
Mortgage on rental property: $240,000
HELOC (used as down payment for rental property, write interest off against rental income: $70,000.

Retirement income projections next post.


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## Bananatron (Jan 18, 2021)

*Retirement income:*

I expect to score about 33/39 on the eligible years to get the CPP maximum. I did make partial wage from ages 18-22 but I didn't start exceeding the CMPE till 22. 

*Estimated CPP benefit at age 60 (H): $9245 annually 
Estimated OAS benefit at age 60 (W) : $4500 annually 
OAS benefit at age 65 (H) $7380
OAS benefit at age 65 (W) $7380*

Seeing that I plan on retiring earlier than either of these ages, I figured the easiest way to figure this out was to see how much money I we would need to "bridge" ourselves to 60 and 65 so that we receive an even income throughout retirement.

I use the retirement calculator from vertex42 for these projections:









Free Financial Calculators for Excel


Free collection of financial calculators in Excel, including retirement, 401(k), budget, savings, loan and mortgage calculators.




www.vertex42.com





*Assumptions:*
Average rate of return from age 41-55 - 6%
Average rate of return from 55-80 - 4%
Average inflation rate - 2%

Basically what I am trying to predict what percentage of my registered funds (DC pension and or RRSP) today will be put aside for the bridge amount. For example, if I was to invest $26,000 today at the above assumed rates, that would allow me to pay myself $9245 per year from age 50-55.

H - Money required to bridge CPP benefits from 55-60 - $26,000
H - Money required to bridge OAS benefits from 55-65 - $39,500
Total registered funds to set aside to bridge government benefits: $65,500

W - Money required to bridge CPP benefits from 55-60 - $12.500
W - Money required to bridge OAS benefits from 55-65 - $39,500
Total registered funds to set aside to bridge government benefits: $52,000

Total Income CPP & OAS from 55 - death
*H- $16,625
W - $11,880*

Income from registered funds:
Same assumptions as above, payable from 55-80. I know we will likely live over 80, but I figure we can live off the indexed government benefits, DB pension and home equity at that time.

H - Total Registered funds ($470,000 less what is required to bridge government benefits)=$404,000

H - Registered income from RRSP's and DC pensions: *$34,500*
H - DB pension - *$45,000*

W - Total Registered funds ($139,000 less what is required to bridge government benefits)=$87,000

W - Registered income from personal and spousal RRSP's: *$7500*

Summary up to this point:

Husband
CPP & OAS - $16,625
DC pension and RRSP - $34,500
DB Pension - $45,000
Total: $96,125 per year from 55-80 (gross)
*Total net after taxes: $74,000* (Retirement income does not pay into CPP and EI - please correct me if I am wrong)

Wife
CPP & OAS = $11,880
Spousal and Personal RRSP: $7500
Total: $19,380 per year from 55-80 (gross)
*Total net after taxes: $18,500*


If we were to stop investing completely today, simply let our money grow till 55 and rely on my DB pension from work, we would expect to net after taxes from 55-80 approximately* $92,000 per year*. 

This obviously is a smooth transition over to retirement with zero sacrifices in quality of life (spending), and actually gives us a little bump, especially without kids.

These projections were made without our current TFSA savings and future savings, and ignoring the rental property.

So I'm left thinking about that extra $40,000 per year that we've been saving/investing. Which leads to the question in the following post.


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## Bananatron (Jan 18, 2021)

If you see any errors in my calculations/assumptions, please point them out. Thats the biggest reason for posting this thread, to have a second set of eyes on this.


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## Bananatron (Jan 18, 2021)

*To the advice section:*

Am I crazy for thinking we can easily afford to upgrade our home and take on another $250,000 - $300,000 mortgage after paying off ours before 40? Retiring before 55 is not really an option with how the DB pension is structured. Plus I kind of think 55 is early enough.

We're not the type that would enjoy a second property/lake home. We're not big car people. We're content driving older vehicles and when it comes time to upgrade we're happy to drive something a few years older. Put simply - a vehicle upgrade can be absorbed in our families $80,000/yr budget.

It appears that we have enough money currently put away with conservative estimates to live a comfortable retirement. I'm wondering what the point would be to continue socking away money continuing to live the same lifestyle only to have more money than we need at retirement? We should be enjoying that money now?

Even if we got a mortgage that cost us $15,000 a year, that still leaves ~$20,000 a year to put towards TFSA's after putting the $5000 towards the RESP's. With the mortgage paydown and the TFSA growth we still should be able to pay off the mortgage balance with the TFSA balance at retirement date.

So...am I nuts??


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## peterk (May 16, 2010)

So your net income comes from two "normal" full-time salaries of about 80-120k? Or is it you make $200k and your wife not much?
And at least 1 of those salaries is from a job position that you'd call "quite secure"?
And you realize that $80k/yr spending, not including mortgage payments (which you don't have), is kind of "high-ish" for spending, and this could be cut back to $60k/yr without suffering too much?

If yes, then I think it's pretty obvious that you can easily afford the $1M house and a 300k, 15yr mortgage. I would think it would be considered a small risk to take on the house if you both work jobs, and a moderate risk, that you might want to be nervous about, if you are the only breadwinner.

Is your company pension robust and secure or might the company go boom one day (the same day you lose your job)?

I think if you can accept the worse case scenario as something you can work around - Downgrading in retirement, cutting expenses, I have a hard time seeing how getting the bigger house will lead to your financial ruin, so long as you can hustle an income to cover your living expenses and mortgage payments until 55. You'll still have a large RRSP and government pension, and a small company pension (if you were to lose your job now).


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## Bananatron (Jan 18, 2021)

Thanks for the reply. Yes, good assumption. I actually make around $180k and the wife has been a SAHM for the past 7 or so years. I know I'm baring my entire finances for the world to see but I still feel weird disclosing every detail.

She has started easing back into the workforce and will likely be fulltime ($30-40kish/yr) sometime in the next 3 or so years. Or maybe stay part time. Whatever she makes is just bonus/play money.

As for cutting the lifestyle back - yes I realize we spend quite a bit and live a fairly decent life but I will not sacrifice our current lifestyle to accommodate my lust for a new house.

My line of work is quite secure - but the DB pension is not. It could go away tomorrow, but it would be replaced with some sort of DC pension or share purchase program worth in the neighborhood of $20,000 to $25,000 per year, which would create an income of roughly $22,000 to $26,000 at 55.

With the current accrued value of the DB pension and potential payout (I have accounted for tax implications with the net present value) I have accrued enough to supply about $16,000 retirement dollars using the above assumptions. Something like losing my DB pension would possibly force me to work 2 or 3 years longer depending on the generosity of the new pension and rates of return, or perhaps retire at the same time and lower retirement expectations.

As I mentioned, I don't want to sacrifice any part of our lifestyle for a mortgage - so this is what I'm thinking:
I have a current TFSA balance of ~$65,000 which I don't have really any short or long term plans for. It is currently invested 100% in VGRO.

Take out a $300,000 mortgage at a 25 year amortization. Balance after 14 years (age 55) would roughly be $160,000 (@ 4% average interest rate).

$65,000 in the TFSA invested at 5% over 14 years would be roughly $130,000. If I could be bothered to regularly invest $100/mo in the TFSA over those 15 years I would have enough of a TFSA balance to rid myself of the remaining mortgage at retirement age.

The biggest thing we are sacrificing with the new mortgage as you alluded to is that now my job becomes very important again. If I lose it I better hustle to get another one. The TFSA balance could essentially serve as an emergency fund which would cover mortgage payments for roughly 3 years. I really hope to avoid a situation where I am unemployed for 3 years as this would throw a slight wrench into my plans, haha.

Anyways, thanks for the input. Definitely food for thought.


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## peterk (May 16, 2010)

Sounds good. If you think your job is secure, or you could get a different one with a 100k salary at least, and your wife can go to work for 30k at least, then you're in pretty good shape for the $1M house.


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## badfish (Dec 17, 2018)

Thanks for sharing Bananatron. Our family is quite similar to yours save for 5-6 years further down the road. Relatively similar financial position as well - close enough to coast into retirement at 55-60 depending on how lavish it is, but also not quite there yet. Our house is paid off, but is smallish - two teenage daughters sharing a very small bathroom and smallish bedrooms is quite fine by any standard, but we have income to invest and no debt. Given the principal mortgages are tax free, we're starting to wonder if dumping another chunk into the house isn't one of the better ideas (assuming registered investment space is all maxed). Having no mortgage is a big psychological win but it's also one of the better leveraged investments you can make.

All that said, we're shopping a bit and looking at a mortgage we can pay off in 5-7 years that will improve our living situation but also give us another asset to help fund retirement.


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## peterk (May 16, 2010)

^ How does a bigger house give you "another asset to help fund retirement"?

Not only are you wasting hundreds of thousands of dollars into paying off the larger mortgage, which could go into investments instead, you are taking on a larger house with increased expenses and taxes, which you'll pay forever all through retirement.


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## Bananatron (Jan 18, 2021)

badfish said:


> Thanks for sharing Bananatron. Our family is quite similar to yours save for 5-6 years further down the road. Relatively similar financial position as well - close enough to coast into retirement at 55-60 depending on how lavish it is, but also not quite there yet. Our house is paid off, but is smallish - two teenage daughters sharing a very small bathroom and smallish bedrooms is quite fine by any standard, but we have income to invest and no debt. Given the principal mortgages are tax free, we're starting to wonder if dumping another chunk into the house isn't one of the better ideas (assuming registered investment space is all maxed). Having no mortgage is a big psychological win but it's also one of the better leveraged investments you can make.
> 
> All that said, we're shopping a bit and looking at a mortgage we can pay off in 5-7 years that will improve our living situation but also give us another asset to help fund retirement.


Congrats on being debt free - it definitely makes me look at things differently, and thinking about getting into a mortgage again makes me revisit those unpleasant thoughts about how I used to feel about work. I mean I still need a job but I don't _need_ a job. 

We had a realtor come through and she gave us some tough love about what we should expect to get for our home, which was about 50k less than I estimated. I'd rather know now than at crunch time when I need the funds to close. 

Anyways, this idea came kind of quickly to the wife and I after I spent some time figuring out our finances - I think we're going to put it on pause for now. We have a great house already and neither of us wants to take a loss on it even though its all relative - the move up house likely cost more than we would pay for it.

I'll keep this updated for anyone who is interested.


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## milhouse (Nov 16, 2016)

My two cents...
On the surface, the math seems to add up so I won't dive into that.
Have you given consideration to risk scenarios? What happens to you plan if you can't work to retirement to retirement age due to health issues/what's your long term disability coverage? If you pass away, will your wife have enough to live on/does your DB have joint life guarantee options?
IMO buying a larger house is a life-style discretionary spend. I've considered it too because I like entertaining but the misses is against it and so I'm allocating the funds instead to retire a few years earlier. It's a kitchen table discussion but I'm assuming there's value for a larger place with still young children. What happens when they move out? Do you keep the larger home or do you downsize?
My inlaws are in the midst of selling their place and downsizing and listening to the friction costs of realtor fees, property transfer taxes, moving costs, etc. make me want to cry.


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## Bananatron (Jan 18, 2021)

milhouse said:


> My two cents...
> On the surface, the math seems to add up so I won't dive into that.
> Have you given consideration to risk scenarios? What happens to you plan if you can't work to retirement to retirement age due to health issues/what's your long term disability coverage? If you pass away, will your wife have enough to live on/does your DB have joint life guarantee options?
> IMO buying a larger house is a life-style discretionary spend. I've considered it too because I like entertaining but the misses is against it and so I'm allocating the funds instead to retire a few years earlier. It's a kitchen table discussion but I'm assuming there's value for a larger place with still young children. What happens when they move out? Do you keep the larger home or do you downsize?
> My inlaws are in the midst of selling their place and downsizing and listening to the friction costs of realtor fees, property transfer taxes, moving costs, etc. make me want to cry.


You're 100% right buddy, on everything. The crazy thing is our house is great. The backyard is private, kids have all kinds of space inside. The only issues we really had were the yard was a bit small (too small for a decent hockey rink but plenty for a trampoline) and I don't have a third or fourth garage bay for my current or future toys. That's it. 

And the stupid thing is we would have had to move out of town to an acreage and increase all kinds of daily commutes just to get these things. And then considering downsizing and the friction fees like you say. Literally temporary insanity haha.

That said, looking at our budget and finances, I think it is time for a budget adjustment. 

One option i had considered in the past was a reduced hours lifestyle before retirement. Half time from 50-55. My son would be only 17 at that time, maybe I could watch more of his hockey games. 

Reduced hours would gross approximately $75,000 per year from 50-55. 

Net after tax $56,000

Wife part time work $10,000 gross

Net after tax $9,300

Total net: $65,300

Required annual TFSA investment from 42-49 to bridge 50-55 years to:

$80,000 net: $7000 per year
$100,000 net: $16,000 per year

So instead of socking away as much as I can, I limit my savings to $20,000 per year between TFSA and RESPs.

Take the remainder and put it towards whatever. Winter vacations, newer vehicles. 

I don't know, I've never really wanted or felt like I missed out on anything with our current lifestyle. 

But it just doesn't make sense to continue living a life below what i expect in retirement simply to pad my retirement nestegg.


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## badfish (Dec 17, 2018)

peterk said:


> ^ How does a bigger house give you "another asset to help fund retirement"?
> 
> Not only are you wasting hundreds of thousands of dollars into paying off the larger mortgage, which could go into investments instead, you are taking on a larger house with increased expenses and taxes, which you'll pay forever all through retirement.


Don’t want to distract too much from the OP’s thread. My thinking is that at 1.5%, investing in one’s home is pretty cheap. If you buy in areas you expect to see price growth due to limited quantity you’re likely ok. Being able to sell an expensive primary residence possibly in an expensive location (close to work) without paying tax on the gain is a boost I’m counting on for retirement. Selling a 2M house in Toronto that would cost 750k farther out of town for example. If I dump more into said home now, assuming the real estate market doesn’t cave, most of the cash I put in will come out again when I sell it (save for fees etc). It’ll be a bit more expensive to run for sure but may provide improved quality of life..


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## Spudd (Oct 11, 2011)

I would just keep doing what you're doing, except save 20k per year instead of 40k (assuming you actually have things you want to spend 20k/year on). This would bring you up to 100k/year of spending and still put away some $$ so your retirement income might be closer to 100k. I don't see the point of spending less now while you have kids if your retirement income will literally be higher than what you're spending now.


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## Bananatron (Jan 18, 2021)

Spudd said:


> I would just keep doing what you're doing, except save 20k per year instead of 40k (assuming you actually have things you want to spend 20k/year on). This would bring you up to 100k/year of spending and still put away some $$ so your retirement income might be closer to 100k. I don't see the point of spending less now while you have kids if your retirement income will literally be higher than what you're spending now.


That is 90% of what we are leaning towards - its a hard habit to break once you've literally saved everything you could for over a decade, but maybe its time to treat ourselves a bit. We haven't gone on a winter vacation since 2015, not that we'd do that every year but at least every other year. Our newest vehicle is a 2011 with 150k kms on it. It still looks and runs great, but maybe we can buy something newer guilt free.

I guess after all the bills are paid we have to get used to putting something in a spending account and something in a savings account, and to spend whats in that spending account.


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## Plugging Along (Jan 3, 2011)

We are in a very similar situation but about 5 years ahead in age and finances. We have also debated a house upgrade many times. We can afford it, but have decided instead of taking out another mortgage, we are saving in additional to our regular savings, a bucket for renovations or a house upgrade. We decided that we didn't like the idea of having a mortgage when we are older even if we are stable, and have decided that with the house upgrade we will follow the same rules we did for everything else which is we won't buy it until we have the cash in the bank to do it. To me it makes very little sense to go from being debt free and financial secure to having to work to cover a debt.


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## Bananatron (Jan 18, 2021)

So


Plugging Along said:


> We are in a very similar situation but about 5 years ahead in age and finances. We have also debated a house upgrade many times. We can afford it, but have decided instead of taking out another mortgage, we are saving in additional to our regular savings, a bucket for renovations or a house upgrade. We decided that we didn't like the idea of having a mortgage when we are older even if we are stable, and have decided that with the house upgrade we will follow the same rules we did for everything else which is we won't buy it until we have the cash in the bank to do it. To me it makes very little sense to go from being debt free and financial secure to having to work to cover a debt.


Your last sentence nailed it. It was temporary insanity.

And I don't think we're going to increase our lifestyle either, just because we can. I'll probably continue to invest at a similar rate and stockpile that cash for a rainy day. Eventually the wife and I both will need new (one or two year old) vehicles. It would be nice to have cash on hand to buy or even better dividend income from the tfsa to partially cover the payments. 

The idea of forfeiting a stress free debt free lifestyle that we sacrificed 11 years for is just insane. I have some friends that
have a combined income probably a bit higher than ours is, but they bought a giant house and have a $600,000 or $700,000 mortgage. He recently lost his job and his severance is running out. They don't seem to be too stressed about it but that's a lot of pressure on the main earner, especially when you're starting a family. 

I don't ever want to be in that situation. It's no accident that we are where we are, to give that away for a big house that we're going to downsize from in a dozen years? Naaaah.


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## Bananatron (Jan 18, 2021)

Just a note, I've been looking at the numbers/calculations closely over the past week - with the breakeven point for early cpp at 73.5 years or so and having more than enough funds to cover the bridge till 65, it makes much more sense to wait for full cpp at 65 rather than taking the 36% lifetime haircut to take it at 60. Going the other way benefits at 65 are actually 56% more than early benefits at 60. The math kind of boggled my mind haha. ($640 vs $1000)

Taking late benefits at 70 is a different story. The breakeven point compared to early benefits at 60 is 77.5 and to full benefits taken at 65 you don't pull ahead till 81.

It seems, at least for my situation, that cpp at 65 makes the most sense.


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## kcowan2000 (Mar 24, 2020)

Just beware that the CPP calculator assumes you will work until 65. Every year before that is a dropout year and you are allowed 10. The income they project for age 70 assumes working at current income levels until 65. Neither are correct.


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## Bananatron (Jan 18, 2021)

kcowan2000 said:


> Just beware that the CPP calculator assumes you will work until 65. Every year before that is a dropout year and you are allowed 10. The income they project for age 70 assumes working at current income levels until 65. Neither are correct.


Oh, I did not know that. So you're saying that if I put my expected and past earnings in the inputs on the government of Canada calculator (I had put 0 earnings beyond 55) that this is incorrect?

It does appear that I get full pension at 65 (with exactly 10 drop out years) but I don't get the full 8.4% per year if I wait till 70.


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## kcowan2000 (Mar 24, 2020)

Correct. If your earnings increase substantially during the allowed period, you might want to drop out some of those. I was self-employed and managed my income to have lower tax years that I dropped out.


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