Three paths to financial freedom
Reconciliation could help Linda’s 10-year retirement plan, but she’s unsure of what the future holds
Linda is a 55-year-old woman who ended a relation- ship with David a few years ago. But the couple is thinking of reconciling. Linda works as an administrator earning $70,000 a year and will receive a small defined benefit pension plan, about $12,000 a year. David, 59, is a labourer whose employment prospects fluctuate every year. The problem Linda has spent many years living for today with little thought of the future. Linda’s recent home purchase left her saddled with big mortgage payments and home repair expenses. As a result, she’s seen increased debt on her line of credit and credit card. At the current repayment rate, their mortgage will not be paid off until she is 77.
Linda wants to know if she can retire at 65 in spite of her debts. Even though she’s contemplating a reconciliation, she wants to rely on her own financial resources since she’s unsure of what the future holds. The particulars: Assets House: $550,000 RRSP: $8,800 Linda’s liabilities Mortgage: $283,000 Line of credit: $10,000 Credit card: $29,000 The plan If Linda wants to retire on her own terms, she should have her debts eliminated by the retirement date, says Charmaine Huber, a money coach at Money Coaches Canada. Linda loves her house and the neighbourhood.
Huber notes that Linda’s workplace pension, government entitlements and RRSP would only provide her with enough income to cover all of her discretionary expenses, not the mortgage.
Linda has three options to eliminate debts:
Option A: Sell the house when she retires, then use the proceeds to pay off the debt. Luckily for Linda, she lives in Canada’s largest city, where demand for houses exceeds supply. If Linda chooses this option, they would have to move farther north or east where rent, a house and overall cost of living is cheaper.
Option B: Keep the house, and pay off the credit card and line of credit debts now. Linda currently has less than $300 a month available for debt repayment, enough to cover just the interest.
Put another way, she doesn’t have enough money to actually eliminate the debt each month. But if she sold or returned her leased car back to the dealership, it would free up $580 a month. Linda is in the rare position of living fairly close to her employer.
Linda currently owes $9,500 on a line of credit and $28,000 on her credit card. If Linda paid $800 a month for the debt, $625 of that amount going toward her higher-interest credit card and the remaining $175 toward the line of credit, this debt will be gone in five years.
But she could only do this if she did not have a car payment.
“If she were to consolidate both debts into one single loan payment at 6 per cent, depending on her credit score, it would cost her $725 a month,” Huber calculates.
If Linda could qualify for a Home Equity Line of Credit at prime plus 0.5 per cent (3.2 per cent), then her debts could be paid off in five years with monthly payments of $675 a month. But again, that’s still more than she has available unless she gives back her car.
Or Linda rolls her consumer debt into her mortgage when she renews in 2019. Then she would just have one monthly payment. “However, she would have to be very careful to not rack up her credit card and line of credit again,” Huber notes.
Once these debts are paid off, Huber advises Linda to redirect their extra money toward the mortgage. “This extra payment would still not be enough to reach retirement mortgage-free by age 65, although the extra $800 a month would shorten her amortization significantly,” she says.
Having their mortgage paid off by 65 is unlikely. It would cost Linda an extra $1,100 a month in mortgage payments, Huber says.
“Unfortunately, this would not be possible for them as their cash flow could not handle this increased mortgage payment,” Huber says. “But once they have the extra $800 a month to put toward their mortgage payments, they could eliminate it by age 70 instead of age 77.”
She could also take on a part-time job to further help with expenses.
Option C: Linda and David could pool their financial resources. They would each have to pay off their consumer debt and have no car payments to be able to handle the mortgage payments for five years when Linda retires at 65. “Financial freedom would be achievable, but careful planning would be required by both of them,” Huber says.