DIANNE MALEY
From the Globe and Mail

Mariah is a single mother with a good job, a nice house in Halifax and three children, one already in university.

At 47, she is beginning to think seriously about planning for the day – perhaps 15 years hence – when she can retire from her job in health care. She has $131,500 in her registered retirement savings plan, $52,715 in a group RRSP-type pension plan with a previous employer, and another $40,000 in registered education savings for her children. She will start contributing to her company’s defined contribution pension plan in June.

On top of her $85,280 annual pre-tax salary, she gets child support from her ex-husband, who is also helping with education costs.

But Mariah’s main asset is her house, which she values at $600,000. She recently borrowed $30,000 on a line of credit to upgrade the property, renovating the kitchen and bathroom. She plans to roll this debt into her $219,000 mortgage, which is open with a fixed rate of 2.75 per cent.

“My main worry is whether I am doing the right thing for retirement,” Mariah writes in an e-mail.

We asked Dawn Smith, a planner with Vancity/Credential Asset Management in Vancouver, to look at Mariah’s situation.

What the Expert Says

First, the mortgage. Normally, Ms. Smith would not recommend paying off consumer debt with a mortgage, but because the money was used for home renovations, doing so makes sense in Mariah’s case. The planner recommends Mariah negotiate the best possible rate on her mortgage renewal as soon as possible before interest rates rise any further.

“Do this now,” the planner stresses.

In today’s low-rate environment, Mariah might be able to negotiate a rate as low as 3.75 per cent for a five-year, fixed-rate closed mortgage, she notes. With a 15-year amortization, the loan will be paid off by the time Mariah retires at age 62.

A comfy retirement may require some rethinking.

Mariah has set her retirement income needs at 70 per cent of her existing salary – about $46,563 after tax in current dollars. If she continues to contribute $6,000 a year to her registered savings plans, she will have $614,552 (in 2025 dollars) in 15 years to supplement her Canada Pension Plan payments, which she can begin collecting as soon as she retires, and her Old Age Security, which she can start collecting at age 65.

Mariah would have enough money to meet her goal only if she plans to live to age 75, the planner says. At that point she will run out of savings.

“So, what if you plan to live longer?” Ms. Smith asks rhetorically.

Mariah has several choices.

She could lower her income needs to about 60 per cent of her current salary. She could save more, raising her annual RRSP contribution from $6,000 to $10,000. She could work longer, or sell her house at some point and buy something smaller.

Suppose she does the first three but keeps the house for the time being. When she retires at age 65, Mariah will collect $14,481 a year in CPP and $8,238 in OAS (2028 dollars). Her after-tax income requirement that year will be $57,003, a good proportion of which might come from her salary, depending on when during the year she quits working.

The next year – her first full year of retirement – she will begin drawing on her registered savings. Her income needs, indexed for inflation, will have risen to $58,713. CPP will comprise $14,915, OAS $8,485 and withdrawal from RRSPs $35,313. Her money will last until her 90th year, at which point she would still have her house.

The planner has estimated a 5-per-cent average annual rate of return on investments and inflation of 3 per cent a year.

Ms. Smith also suggests Mariah sit down with an investment adviser to discuss her risk tolerance and investment objectives.

Mariah’s life insurance is through her employer; she also has mortgage insurance. The planner recommends a personal insurance policy large enough to cover the mortgage, while it lasts, and the needs of her dependents, and that will continue regardless of whether she changes jobs. Because she is the sole provider working in a specialized field, she may also want to review her disability insurance to make sure it covers her regular occupation.

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Tags: education savings, line of credit, pension plan, retirement, savings plan