Planning a FIRE in Canada

[Canadian FIRE]

Hi there,

I've been lurking here for about a month now and finally signed up. I have to say I love reading all your posts. This is a great board!

Anyways, here is my situation. I'm 27, married, one baby boy and plans for a second baby in the next year or two.

I just came across the idea of early retirement in the last year. So far here's the situation.

House $135K market value, 109K left on the mortgage at 4.9% for a five year term. (I just got it in 2004) My student debt is gone last year and my wife's debt should be paid off in six months or so. No emergency fund currently. Our baby boy came 10 weeks early so that wiped my old fund out. After I pay off the last student loan, I'm building the fund back up to 5K. I've also got a 10K line of credit I can use in case of an emergency.

After taxes monthly expenses are as follows: 21% House payment, 34% remaining living expense, so 45% left for savings and debt payments.

Limited other savings. RRSP - 16K for both of us. 3K in an investment account.

So my question is should I start paying down my mortgage after paying off the last of the student debt (keep in mind in Canada, I don't get to write off any interest of the mortgage) or should I start building my nest egg for early retirement? I plan on retiring in two phases. Phase 1: Age 45 to 65 - Use a nest egg to live for 20 years. I'm not interested in having any nest egg left at the end. Phase 2: Age 65 and on. Use RRSP and government benefits to live in this period.

Ideas on all of this would be helpful. I'm just trying to decide on a game plan for the next five years or so.

Thanks for you help.

 

[Nords]

Welcome to the board, CF. Sounds like you're off to a great start, although nothing screws up a good financial plan like those darn kids.

Are you able to buy CDs yielding more (after paying taxes on the CD revenue) than your mortgage? If that's the case then it makes more sense to build up your retirement portfolio and pay the minimum required on the mortgage. If nothing else you could set a portion of your savings aside in a high-paying multi-year CD and the rest of your savings in your long-term (18 years) asset allocation.

What happens to the mortgage after five years-- does it balloon or does it go to a new interest rate? If it balloons or if the rate jumps then you could take another look at the money you've built up in the CD and decide whether it makes sense to continue the arbitrage.

 

[Maximillion]

Contribute to the RRSP then use refund to pay down Mortgage, except if you are a Teacher or have a Plan that pays 2% + for Pension Earnings(i.e. for each year worked you get 2% of your salary as a Pension), in which case, pay down the mortgage.

A couple with Full CPP/OAS gets about $34,000 Indexed so , with a company pension, an RRSP might be moving you into a higher tax bracket.

Financial Webring.com is a Canadian site that deals specifically with these issue.

I have met several elderly people lately who wondered why they saved so much as they have mich more money than they need, some of us will be recipients of generous inheritances.

An additional benefit of an RRSP is if you lose your job or go back to school, you may withdraw the money at possibly a lower tax rate.

Another wrinkle is if you get a sizeable amount in there, you can use it as your own Mortgage and pay yourself.

 

[Zipper]

Don't count on much CPP if you only work 'til 45.

OAS at 65 will give you roughly $6000 in 2006 dollars.

In order to build up a big nestegg it is very important to max your RRSP's each and every year.  Put the refund and any extras on the mortgage. These early contributions will compound nicely.

Unfortunately you will be sacrificing the sweet years between 45 and 55 when compounding really takes off.......

Kids are very expensive so make sure you double factor their cost. Move to a bigger, better, and last house when you are around 40.

My advice would be work 25 years. That would make you 52.

Your RRSP's will continue to compound, the kids will be gone, hopefully, the bigger house will be paid off, and you will be eligible for full CPP at 60 minus the early retirement penalty.

In addition, if you paid into any DB pension plan you can commute and start drawing at 55.

That's pretty well the way I did it. I worked 33 years and left at 54. I'm now 62.

Mrs. Zipper is 6 years younger and took 5 years off to look after our 2 boys. She plans to work until 60 and then begin CPP.

You won't need to worry about Health costs in Canada. You may need supplemental drug benefits until you hit 65.

 

[bruce1]

Welcome from a fellow Canadian. I am looking at retiring in the next year (I am 52 now). I would build up the emergency fund to more than 5k (six months expenses) and not rely on the LOC as it is probably based on your incomes and if they fail you will find the fine print in the LOC may well eliminate your cushion. Credit cards can also have their limits reduced and interest rates increased if you are deemed to be a high risk by the card company.

Watch carefully the RRSP's and take into account both the tax credit and the tax bite when you withdraw the funds. Capital gains are taxed much more favourably than RRSP withdrawls. I tend to keep fixed interest (GIC's) which would be highly taxed anyway in the RRSP to take advantage of tax free growth and stocks ect outside of the RRSP to take advantage of the tax treatment of capital gains. There was a proposal by some conservatives in the last election to eliminate the capital gains tax. I will be watching this carefully.

I would pay the mortgage before RRSP but that may be because I hate debt and is dependent on your tax bracket. Actually if I had to do it over again I would probably stay away from RRSP and buy rental property.

Too bad I did not start thinking of this when I was your age but I am lucky and persistant enough to have a good defined benifit plan and the other investments are mainly for extras.

Bruce

 

[Canadian FIRE]

Well thanks for the ideas so far.  I'll include some more information that should clear up a few things.

Are you able to buy CDs yielding more (after paying taxes on the CD revenue) than your mortgage? If that's the case then it makes more sense to build up your retirement portfolio and pay the minimum required on the mortgage. If nothing else you could set a portion of your savings aside in a high-paying multi-year CD and the rest of your savings in your long-term (18 years) asset allocation.

What happens to the mortgage after five years-- does it balloon or does it go to a new interest rate? If it balloons or if the rate jumps then you could take another look at the money you've built up in the CD and decide whether it makes sense to continue the arbitrage.

Based on the your idea Nords, I should invest rather than pay down the mortgage.  The investment account is under my wife's name, so with her running the daycare, her investment income gets taxed at 3.5% for dividents and 10% for captial gains.

The mortgage is a closed five year term, after that I have to refinance to a new rate.  Total lifespan of the mortgage is 20 years.

Contribute to the RRSP then use refund to pay down Mortgage, except if you are a Teacher or have a Plan that pays 2% + for Pension Earnings(i.e. for each year worked you get 2% of your salary as a Pension), in which case, pay down the mortgage.

A couple with Full CPP/OAS gets about $34,000 Indexed so , with a company pension, an RRSP might be moving you into a higher tax bracket.

I'm currently putting about $3k/year into RRSP's.  Mine and a spousal account so I can income split in retirement phase #2.  I've got about $7K in unused contributions I can top up.  I plan to contribute until I'm 45 then stop.  I've got a fully funded company penstion that give me a defined benifit.  If I leave early I get a lump sum payment which I can transfer to the RRSP.  A conservative estimate would mean I can expect at least an additional $25K.

OAS at 65 will give you roughly $6000 in 2006 dollars.

In order to build up a big nestegg it is very important to max your RRSP's each and every year.  Put the refund and any extras on the mortgage. These early contributions will compound nicely.

Unfortunately you will be sacrificing the sweet years between 45 and 55 when compounding really takes off.......

Kids are very expensive so make sure you double factor their cost. Move to a bigger, better, and last house when you are around 40.

My advice would be work 25 years. That would make you 52.

Your RRSP's will continue to compound, the kids will be gone, hopefully, the bigger house will be paid off, and you will be eligible for full CPP at 60 minus the early retirement penalty.

In addition, if you paid into any DB pension plan you can commute and start drawing at 55.

That's pretty well the way I did it. I worked 33 years and left at 54. I'm now 62.

Mrs. Zipper is 6 years younger and took 5 years off to look after our 2 boys. She plans to work until 60 and then begin CPP.

You won't need to worry about Health costs in Canada. You may need supplemental drug benefits until you hit 65.

Zipper thanks for giving me a few things to think about.  I should point out the RRSP are going to be strictly for the phase two retirement (65 plus).  So I'm still going to get that sweet compounding between 45 to 55, so if I stop putting anything additional it won't really matter since its mostly going to be compounding interest for that period.  I will still get some CPP income, but I'm taken that into consideration for my models to date.  

I'm lucky that my wife chose to start a daycare in the house instead of going back to work, so we have no daycare costs and she is really good at estimating the cost of the kids so far.  So bacially her business helps cover alot of the kid related costs.  Toys, kid movies, lunchs are all deducted off of taxes as business expense.

Phase 1 of the retirement is stictly going to come out of the investment account, so with our new lower income I'll only be about 5% to 10% tax.  Rather than the 15% tax if I put it in the RRSP and draw out later.  At least that's the plan I'm keeping the RRSP's as backup in case of major problems with the investment account money.

Thanks for all the ideas so far.  It's helping me round out some cost estimates and my plans.

CF