Carrying a Mortgage into Retirement – An Early Retiree Case Study

Synopsis: The following case study was prepared to demonstrate how investors may consider structuring their asset drawdown plans, including carrying a mortgage into retirement.

Thanks to a reader, Adam (changed for privacy/publishing purposes), for sharing their information.

Carrying a Mortgage into Retirement

Adam admits, his retirement draw-down plans with his wife might be a bit more complicated than most but like most retirees, he wants to ensure he and his wife do not run out of money.

Adam and his wife (Carlene) want to enjoy retirement, freely, so that means managing personal assets well.

Beyond questions such as when to take CPP in retirement, we’ll see in today’s case study that Adam and Carlene have another question many Canadians want an answer to as well – what can they afford to spend throughout retirement (and not run out of money)!

If you are interested in reading more about when to take CPP in retirement, check out our previous case study:

When to Take CPP in Retirement.

Let’s look at Adam and Carlene’s profile, goals and future projections!

Case Study Inputs and Assumptions

Here is what Adam told us when it comes to his plans (information adapted only slightly from our correspondence).

Hi Guys,

I’ve done lots of thinking on this but would always like another take even just for information purposes and things to mull over…I think what you are doing on this site is great!

I’m aiming to have a $1,400 mortgage on my retirement home for the first two years and carry it into retirement. Not typical I know but read on!

We have a rental that we aim to sell after the five year lease is up – in two more years. Once sold, we’ll put all that equity into our upcoming retirement home that is purchased as of now. We move in soon!

I have an open mortgage which would leave us with about $95,000 owing on the retirement home after we move in. Again, with rates in my opinion still being so low I would opt to continue to carry that mortgage into retirement rather than pay it outright. It’s only for a few years anyhow.

I should mention our rental home is cash flow positive at $120 per month – my tenants are fabulous.

We got a couple of LIRAs (Locked-In Retirement Accounts) that will give us solid yearly income.

We do not have any defined contribution or defined benefit pension plans.

We discussed my wife should probably start her LIF beginning this year at age 57.

I think based on my calculations we can wait to draw CPP at age 70. I mean if we can, why not have that major bump in income for delaying CPP right?

As for old age/OAS, I often see articles advising to take it at age 65. This is one area I’m really struggling with understanding the why of. It would be great to eventually get some information about that. Let’s say we take both our OAS at age 65 for now. 

When it comes to CPP, if I run the estimator on the My Services website I get the following amounts for myself:

• Age 60    $762
• Age 65    $1191
• Age 70    $1691

I will have worked 33 years in Canada when I retire, maxing out 23 years into CPP. I assume that calculator takes that into account?

My wife has worked 25 years but probably only maxed out 10 of those years for CPP contributions. We’re working on getting her access to her My Services so we can run her calculations more closely. I think based on our recent estimations though, she will be entitled to $847 per month at age 65 or just over $10,000 per year.

I guess the challenging part of retirement is the “how much do I spend every month question!”

Embarrassingly guys, I would say that I have never budgeted in my life. I incur very little debt, saving for my expenditures versus paying them back. I can always go without if I don’t have money in the bank account. I bought one new car in my life, I don’t update ten-year-old TVs, I have the cheapest internet, free phones with the lowest gig and cost per month. We entertain ourselves at home or enjoy the outdoors for free.

So, I guess for any projections we could likely pay our mortgage and comfortably live on $40,000 to $50,000 after-tax per year. Let’s go higher though just in case and aim for $54,000 per year.

Our intention will be to maximize our last RRSP contribution room in 2022 and always add the maximum as part of our TFSA contributions each year to shelter as much money going forward.

So, thoughts on all of this?

Let’s look at the projections and find out.

Profile:

• Age 50.
• Desired retirement with his wife – soon – age 51. His wife, age 57.
• Carlene will have a small severance package from work this spring.

General Assumptions:

• Cash return: 1.5%
• Bonds return: 2.0%
• Equities Return: 7.0%
• No plans to take on additional debt long-term.
• Confirmed no workplace pensions.
• No part-time work nor other income in retirement. 
• Will sell rental age 53.

Additional Income:

• Net positive cashflow from rental = $130 per month = $1,560 per year.

Assets:

Liabilities:

• Primary home = rounded to $340,000 balance.
• Rental home = $106,866 balance.
• Future home/retirement home = $95,000 balance for a couple of years until paid off. 

 Retirement goals:

• Plans to sell rental in a couple of years.
• Plan to take CPP at age 70.
• Plan to take OAS at age 65.
• Would like to spend at least $54,000 per year after tax throughout retirement (adjusted for inflation).

More specifically, Adam asked us:

What is the most I can spend annually in retirement (and pass away with few assets)?

Carrying a Mortgage into Retirement Results

Needless to say, Adam and Carlene are in outstanding shape.

We focused on running a scenario for them that including a maximum asset spend, taking CPP at age 70 and taking OAS at age 65.

We also focused on just the sale of the rental home no later than age 53. This is because Adam and his wife plan on using the proceeds from their primary home sale to cover living expenses for a couple of years.

Incredible.

Adam and Carlene will easily have more than what they need to cover their desired $54,000 after-tax spending per year.

Assuming a constant inflation rate of 2% for spending (our standard), to answer Adam’s question (What is the most I can spend annually in retirement (and pass away with no assets) the projections suggest his maximum annual spend is actually double of what they intend to spend, closer to $112,000 per year. 

Even with this spend, Adam and Carlene will still have assets and an estate for someone to manage in old age. An expensive one at that given real estate assets is also expected to climb over the coming decades. Again, we have used a conservative 2% appreciation value.

Carrying a Mortgage into Retirement Summary

Even though Adam and Carlene plan to retire much earlier than average retirees, with sizable LIRAs, a significant influx of cash from a home sale now in progress, and future CPP and OAS benefits to rely on, they can absolutely spend their desired $54,000 per year after tax throughout retirement – and a lot more.

This case study was prepared to demonstrate how investors may consider structuring their asset draw-down plans while carrying a mortgage into retirement. Thanks to Adam and Carlene for sharing this detailed information.

To help you plan for your retirement and help solve the retirement decumulation puzzle, we’ll have more case studies on our site over time.  Let us know if there are any specific scenarios that you would like to see.  As well, make sure you subscribe to our site so you never miss a post!

If you are interested in participating in a case study or obtaining private projections for your financial scenario, please contact us here to get started.

Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only. 

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