Married Ottawa couple Joel and Natalie* are on the hunt for a condo in Florida. They want to rent it out via Airbnb — something they’re already doing with a cottage in Upstate New York — until they retire, at which point it will become a go-to winter retreat.

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Investing in real estate plays a big role in how they are funding the early retirements they want to take. “We have focused on down payments versus RRSP (registered retirement saving plan) and TFSA (tax-free savings account) contributions,” Joel said.

Both graduates of the University of Ottawa — Joel in public policy and Natalie in criminology — they are also both employed in the public sector and concerned about the bite that retiring early will take out of their government pensions.

Joel, 46, works for a Crown corporation and earns about $120,000 a year. He wants to retire in 2035, at age 59. At that point, he will have worked 30 years for the government agency and will be eligible for his full indexed pension, which will be about $101,000 a year.

Natalie, 34, also works for a federal government agency, and wants to retire three years after her husband when she’s 50. She has worked with the agency for 10 years, but retiring at 50 will deeply discount her pension by about 50 per cent.

Natalie currently earns about $80,000 a year and if she retires as planned, her pension (which is also indexed to inflation) will be about $23,000 a year. They wonder if it would be better for her to wait until age 60 to start drawing from her pension.

The couple also have two young children, aged 10 and two, and they have been maximizing their registered education savings plans (RESPs) each year.

“If we retire early, we would have one kid out of university, but one just starting,” Joel said. “The worry would be getting her through.”

In addition to the cottage in New York, Joel and Natalie have a home in Ottawa with a resale value of about $900,000. They have a mortgage of about $350,000 they are aggressively paying off via $2,000 biweekly payments including property tax, and expect to be mortgage free within nine years.

They also have a cottage in Joel’s native New Brunswick. His parents have retired to the cottage and are paying the mortgage and the expenses. Joel and Natalie plan to sell the cottage when his parents no longer need it. Right now, the resale value is about $250,000 and the mortgage should be paid off in about seven years.

The cottage in New York has a current resale value of about US$350,000 and the $118,000 mortgage will be paid off within the next 11 years. It generates an annual profit of about US$20,000.

“After retirement, we plan to stay in Ottawa, spend a few months in Florida, and a few weeks here and there at the Upstate New York cottage,” Joel said. “We love travelling and will likely take at least one trip a year.”

Joel and Natalie want to know if it’s feasible for them to retire at 59 and 50.

“Should we work longer and what would the impact be?” Joel asked. “Are we too invested in real estate? Are we making a mistake by not contributing more or at all to our RRSPs or TFSAs?”

What the experts say:

The best way to confirm with certainty if the couple can comfortably retire at 59 and 50, respectively, is to create a detailed retirement lifestyle plan.

“Only then will they know if they will have enough,” Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, said. “For example, is she OK working for three years after he retires? When she retires, their youngest child is just starting university. They may not want to travel yet. Since they’re maximizing RESP payments, they should have enough money to see both children through university.”

Assuming Joel and Natalie want to maintain their current lifestyle (spending about $100,000 a year after tax and mortgage payments), they are a little bit short, but not a lot, Rempel said.

“Like many people with government pensions, they are thinking about the $101,000 annual pension he will receive 12 years from now as if it were the equivalent of $101,000 today,” he said. “It’s not.”

Rempel said if they both work an additional three years, they will be fine. Otherwise, they have a couple of options that will allow them to stick to their current retirement goal: Spend between $5,000 and $7,000 a year less in retirement (that is, $93,000 to $95,000 per year); or start investing $1,000 a month in a spousal RRSP in Natalie’s name with Joel as a contributor. This will give Joel a 43-per-cent tax reduction and when they retire the income will be taxed to Natalie, who is in a lower tax bracket.

“It’s a big savings they’re leaving on the table,” Rempel said, adding they should consider commuting Natalie’s pension to an RRSP.

“Investing in a diversified global equities portfolio could generate a greater return than the pension and would be the same as working three more years and taking the pension at 53,” he said. “Get the pension estimate from your pension administrator and do the math. Delaying Natalie’s pension until 60 doesn’t help since it will require them to save more money between now and her retirement.”

Another option to keep their retirement plan on track is to invest the money from the eventual sale of the New Brunswick property in income-generating investments inside their TFSAs, Allan Small, senior investment adviser at iA Private Wealth, said.

“The investments will depend on their risk level,” he said. “For example, if they have a medium-risk profile, they could invest in dividend-paying stocks such as utilities and telecom stocks. You’re earning dividends and not paying any tax because they are inside a TFSA.”

Small is also concerned that their focus on aggressively paying down the mortgage on their principal home is costing them because there are good buying opportunities in today’s market.

“I don’t think they’re doing anything wrong, but diversification is preferable,” he said

Both experts agree RRSPs and TFSAs can provide cash flow in retirement.

“With so much invested in real estate, they would have hardly any liquid investments they could access,” Rempel said.

*Names have been changed. Interested in a family finance makeover? Drop us a line at aholloway@postmedia.com.

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