Should you own a mortgage in retirement? How you can retire even with debt
For a few years now, I’ve been inspired and motivated by early retirement.
We continue to be a fair distance away from realizing our financial goals – but we are getting closer every month. This is one major financial goal. I hope we can get there in another 5-10 years.
This is another one – retire debt-free.
Not everyone shares our financial goals though. That only makes sense. Personal finance is personal. That includes the desire to live a debt-free life including in retirement.
In fact, from what I’ve read in various money makeovers and other media articles, becoming debt-free prior to retirement is not something some Canadians believe in. This latest retirement essay will also tell you why.
Using this site to chronicle our financial freedom journey I’ve been fortunate to meet a number of fine folks who are willing to share their financial independence financial stories with me. Today’s post is another story that I hope you can learn from, to help tailor your own plan.
- Name: Gruff403
- Age: 55+
- Retired since: June 2018
- Retirement plans: Six month self-imposed staycation, ski once per week, house projects, coffee with friends, walk dog, coaching, part time work, volunteer work, improving personal fitness, travel.
- Retirement worries: Dying early with too much money. Not taking enough risks in life.
Thanks for taking the time to chat with me Gruff403. Let’s start from the beginning. How did you get started in investing?
My interest in personal finances really came into focus when I got married and the kids came along. Now there was more than myself to be responsible for. I have been a self-directed investor for many years and used to pay $30 per transaction!
My original plan was to work until 60 but as I got closer to being eligible to take my pension, I started crunching numbers in earnest. I realized that I could feasibly work less and make more. Our savings rate over the years averaged about 25%. Pension contributions were 12-14% of that, CPP another 2-3%, RRSP/TFSA 2-4% more, and mortgage pay down 8–12%. I consider my mortgage payments a form of forced savings.
That’s a good savings rate. I have suggested at least 10% net income for my generation (Gen X) is required to retire well and maybe even more for the next generation. What was your investing approach over the years? What did you invest in? Why?
Over the years we have held GICs (Canada Savings Bonds) CSB’s, stocks, mutual funds, and Exchange Traded Funds (ETFs). More bluntly Mark, seems like the approach has been to invest and lose money thanks to high fees, to inflation, to poor stock picks, to selling during market crashes, etc. I’ve made all the mistakes and I know you’ve made some as well.
I was also worried about the proper asset allocation, correct equity vs fixed income ration, and more, until I realized my defined benefit (DB) pension was really my fixed income.
With that understanding, my recent focus is on creating cash flow – so our RRSPs now hold ETFs and Canadian stocks that pay dividends. No GICs, no bonds, no fixed income mutual funds allowed.
Years ago, I noticed that all my equity mutual funds held the same stocks so I decided to build my own fund. Now I’m moving towards 100% dividend growth investing. All Canadian. I believe this approach will work for us.
Sounds similar. I recall this passionate reader suggested starting and maintaining a similar investing journey for millennials in this post: Try this average retirement plan to wealth.
So Gruff403, given your focus on cash flow to supplement your pension – what are your current income streams in retirement?
Our current income streams are a rock solid DB pension, one CPP income, some income from a Registered Retirement Income Fund (RRIF), dividend income, some rental income and a bit of part time work.
Our total for 2019 should be about $62,500 pre-tax once all income streams are set but not including any part time work.
I feel pension/income splitting will make a huge difference as well – to reduce taxes payable.
We never made more than $105,000 as a couple.
Our pension is the cornerstone in the portfolio. It represents about 55+% of my former work pay. When I add on the other sources of income I can get real close to replacing my entire working income.
Impressive stuff. I’ve written about retirement withdrawal strategies on my site. What’s yours? What order are your drawing down your accounts and why?
Hah! Depends on the day of the week Mark!
All accounts will be converted to cash flow, that’s our focus and I think other retirees would benefit from this thinking as well.
We’re currently planning to set our Registered Retirement Income Funds (RRIFs) up to take a bit more than the distributions generated monthly starting 2019. I have built up a small cash buffer in each RRIF account to cover 3 years of payments.
What I mean by that is if I want $200 monthly from one account but it only generates $185, I can take the difference from the cash buffer. We will do that for at least one year. I am also considering topping up to the bottom of the next tax bracket at year end and moving that money to TFSA to reinvest.
We will also collect the dividends from the stocks in our unregistered account as cash. They have been DRIPping for over 20 years now. Time to turn them into cash flow baby! As we get a handle on this retirement thing we plan to empty our RRSP/RRIF accounts by age 70 or earlier. Keep the non-registered account and TFSA intact to pass onto kids.
Alright. Now the pointed question. You mentioned to me you hold debt in retirement. What’s your reasoning for that? Seems risky. I wouldn’t do that!
Mark, I totally agree that being debt free is a great way to go and a wonderful goal to have. It creates flexibility. Congratulations to everyone who has done it. I have been blessed with a rock sold DB pension that pays me annually the equivalency of over a million dollar portfolio. Guaranteed for both our lives and partially indexed to inflation. This guarantees financial security. I could work to 65 and eliminate the debt or leave full time work earlier and find a way to service the debt.
That choice was easy.
We currently use debt as a tool to build income producing assets, cover emergencies and have a little fun.
I am retiring on 78% of my pre-retirement income without working once all the income streams are set in place. If we each work four days per month we will earn 96% of our pre-retirement income. That’s crazy. Pension/income splitting and dropping down a tax bracket will make a huge difference. If I can afford my debt obligations while working full time and grow my net worth, surely I can do the same earning 96% of pre-retirement income.
What I would suggest to investors is look at the structure of your debt. Our debt is the house and a small line of credit (LOC). We own most of our home. I think that owning a house where you have several hundred thousand dollars of equity built up is an opportunity. Use a small portion of that equity to build up other assets that generate some cash flow. Our monthly debt to income ratio is under 30% (mortgage + LOC payment/monthly income). But wait, 55+% of our mortgage payment goes towards principal that builds equity and net worth.
We have always set up our mortgage payments so that at least half of the payment goes to principal. Yes I understand that if we had no mortgage 100% of that money would belong to us. Not our reality but still better than renting in many cases.
Our net worth, if you don’t include any pension value, is in the mid- to high-6-figures. If we die with debt so what as long as there are enough assets to cover the debt and the kids get a reasonable inheritance, we’re good.
Leaving a large legacy is not our priority – sorry kids as you read this!
We also have assets to sell that will substantially reduce the debt and I can always work a few more days a month.
We also hold a life insurance policy that eliminates the debt if I die before 65.
Even if I had no debt, I would not hesitate to leverage 5-10% of the equity in the house and invest in the market. Buy quality dividend payers, continue to pay mortgage style payments until debt is gone, rinse and repeat.
What final words of advice do you have for any investor aspiring for a financially fit retirement?
I’ll be brief and to the point:
- Educate yourself. Learn to be a self-directed investor – thanks for the great blog Mark!
- You have several options when you receive your pay. Spend it, save it, invest it, or give it away to help others less fortunate than you. Do them all.
- Start early, have a plan and be patient. Enjoy the ride to early retirement. The journey is just as important as the destination. Count your blessings along your journey.
- Buy a reasonable sized home in a great location. You don’t need more than 1200 square feet!
- Build contingencies and flexibility into your plan. Be smart with debt, not afraid of it. Don’t overextend yourself. Buy Canadian banks.
- Learn how our tax system works.
- The best legacy our kids get is the example of the life we live, memories we make and that people are more important than things.
- Nobody gets off the rock alive so if you leave enough behind to cover final expenses and a reasonable inheritance. If you did that, you did very well.
Amazing stuff. Thanks Gruff403 for this retirement essay. Lots to takeaway here.
What do you make of Gruff403’s decisions? Would you make the same ones? Why or why not? Do you have a plan to carry debt into retirement?