FP Answers: How should I invest the extra $2,000 a month now that my mortgage is paid off? – Financial Post

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By Julie Cazzin with Doug Robinson

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Q : I’m 48 years old, single and earn an annual salary of $90,000. I have no debt, just finished paying off my house in North Bay, Ont., and it’s worth about $400,000. I also have $35,000 in my registered retirement savings plan (RRSP), which is in cash, and $500 in a tax-free savings account (TFSA), also in cash. I have a small pension with my employer and if I retire at age 58 as planned, my monthly pension payment will be $1,200 a month. Going forward, I plan to save my monthly mortgage payment of $2,000, but I’m unsure what to do with the money. I’m new to investing because my only goal until now has been to pay off my house. I’d like a fairly easy plan for the long term and one that will be tax efficient as well. — Annie B.

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FP Answers : My first thought is to commend you for paying off your mortgage. You should feel great about that accomplishment.

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My first instinct is that you could benefit by hiring a financial planner to help you in the next phase of your economic life, but that is easier said than done, so here are some suggestions that you can implement on your own.

You earn $90,000 annually, live in Ontario and must contribute to Canada Pension Plan (CPP) and Employment Insurance (EI). I will assume you contribute $3,000 annually to your pension plan and have about $18,000 withheld for income taxes. Therefore, your take-home pay is roughly $5,400 a month.

You save $2,000 a month, which was formerly your mortgage payment, so you are spending about $3,400 a month to live comfortably. You plan to retire in 10 years, and have to replace this income. Your pension will be $1,200 a month, which means your investments need to replace $2,200 a month until you are 65 and start collecting CPP and Old Age Security (OAS).

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For simplicity, I will assume you start receiving money from these plans at age 65, but, depending on your future retirement date, you may have to make some adjustments to this assumption.

Since you are retiring early, it is unlikely you will collect the maximum from CPP. Still, assuming you have been working most of your life and earning a similar salary, it is reasonable to think your CPP benefit will be $1,000 a month. You can find out your CPP entitlement by logging into your Service Canada account . OAS is currently about $600 a month and your taxes will decline at age 65 due to increased tax credits.

Of course, this analysis is simplified, and other factors such as health, inflation, investment risk and allocation of spending need to be incorporated into your plan. But the bottom line is you need to replace $2,775 of income a month for seven years (if you retire at 65) and then $1,050 for the next 30 years, assuming you live to age 95.

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Annie, you are doing well. You may need to work past age 58 to achieve your target, but I see a clear path to retiring before age 65.

To answer your question directly, you should invest the $2,000 a month in an RRSP. You will save an average of about 30.7 per cent, or $7,350 a year, in taxes. You can then contribute this tax refund to your TFSA each year since you have unused contribution room.

You will pay about 20-per-cent tax when you are retired and take money out of your RRSP for income. Using an RRSP saves you taxes and defers paying taxes, which is why this is the right solution for you.

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If you invest this money in cash, as you are currently doing, it will grow to about $360,000 by age 58. If you invested it more effectively and earned 4.75 per cent, it will be worth $445,000. As you can see, your investment decisions make a big difference. The extra $85,000 in this example is the equivalent of three years’ worth of working and saving for you.

You are new to investing, so you need to learn and make good decisions so your money is working for you. I understand the burden and stress this can place on people, but I encourage you to learn more about investing and consider getting some professional help with your investments so you stay on track to meet your money and retirement goals. I wish you continued success.

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Doug Robinson is a certified financial planner and wealth adviser with Veritable Wealth Advisory in Peterborough, Ont. Veritable Wealth Advisory is a full-service financial planning and investment firm that employs multiple certified financial planners and portfolio managers with offices in Burlington, Kingston and Peterborough. Veritable has advisers specializing in retirement planning, tax planning and estate planning and most commonly works with professionals, business owners and affluent retirees.

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