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Why I’m reducing my mortgage payments

One of the ideas I’ve been wrestling with for the last few months is my mortgage payments. I’m currently paying $660 bi-weekly, which is approximately $110 more than my minimum payment. I was happily paying this extra money until I realized that early retirement was still my number one financial goal. And if it’s the most important financial goal for me at the moment, why wasn’t my budget reflecting my priorities?

I thought about this for a long time, debated the merits of mortgage payments vs. RRSP with friends, tried to find money in my budget, got jealous because BF has a pension plan waiting for him in less than 20 years… and then I decided to make my move.

Related: What does retirement mean to you?

The extra $110 I’m putting towards my mortgage on a bi-weekly basis is gone. Instead, I will funnel the money into my RRSP/TFSA. That’s an extra $2,860 I can save in 2014, and will help me with my goal of saving at least $750/month towards retirement this year. With the tax refund I will receive, that money will go towards my mortgage as a lump sum payment.

I think this is an appropriate move because even with just my accelerated bi-weekly payments, I will be finished paying off my mortgage before my desired retirement age. And if that’s the case, it makes sense to put extra money into my retirement accounts now so that I can benefit from compound growth for the next 25+ years.

Take a look at the chart below. The dark blue represents accelerated bi-weekly payments without any additional prepayment options. That cut my original 30-year mortgage down by 4 years.

What I have been doing for the majority of last 2.5 years is what the orange represents: accelerated bi-weekly payments with an additional 20% prepayment. That knocked my mortgage down even further, to 19 years. It’s hard to give that up.

I’m anxious about reducing my mortgage payments, because my plan was always to pay down my mortgage as fast as possible. It doesn’t feel right to pay down debt at a slower rate than I’m capable of. But the past 2.5 years of home ownership have taught me a lot. Being a single homeowner is difficult. It’s hard to get ahead, and planning for the future is tough on a one-income household – especially a future that includes early retirement without a company pension. I’m comforted by the fact that my tax refunds will now go towards my mortgage, so at least I’ll continue to over contribute in some way. :) And, by changing the way I save my money, I believe I’m keeping myself on track to achieve my financial goals.

Have you ever had to choose between paying down a mortgage faster or contributing to retirement?

What does retirement mean to you?

Early retirement has always been my biggest financial goal. I talk about it all the time on this blog: I want to retire by the time I’m in my mid 50’s. But what does “retire” actually mean?

My dad retired this year at age 65. He had wanted to retire earlier, but since he didn’t have a pension with the company he worked for, he had to wait and save. As for my mom, she’s got a nice government pension waiting for her when she retires – likely while she’s still in her 50’s. She worked at the government for almost her entire career, and as I look back at the first 8 years of my career, I haven’t had that kind of stability at all. And without a company pension to look forward to in 25 years, the cost of early retirement stresses me out a bit.

When I do my retirement calculations, I don’t include CPP or OAS payments, because I’m not sure I can rely on that money being there for me 35 years from now. But that being said, the average combined annual payout from CPP and OAS is currently $12,528 and the maximum annual payout is $18,372. So if that money is still there when I retire, it will be a significant amount of cash coming in that I haven’t been planning for. Wouldn’t that be nice?

So when I think about retirement, what does that actually look like for me? Retirement to me means having the freedom to do whatever I want to do, without the obligation to work for a living. I guess you could call it financial independence, rather than retirement. I know myself pretty well, and I know that I likely won’t stop working completely when I retire. But I’d like that option, if that’s what I want to do. Maybe some people wouldn’t consider that actually retiring. But retirement can mean different things to different people. Maybe I’ll volunteer. Maybe I’ll travel (I’ll definitely travel). Maybe I’ll become a landlord, or work part-time in a coffee shop, or maybe I’ll still be earning an income through this blog. Who knows what I’ll be up to! But whatever it is, it’ll be my choice, and it won’t be based on the need to bring in an income. Freedom.

Related: Why 20-somethings might have trouble retiring by 65

I’m 31 right now. I’ve always envisioned retiring back in my hometown, with a small home by the ocean. But, a lot can happen in the next 25 years, and I don’t subscribe to the idea of necessarily needing retirement to look a certain way. I may have this exact lifestyle for the rest of my life, or maybe marriage and kids are in my future. Maybe my retirement will look completely different than what I’m thinking of. So while I have very little financial obligation right now in my life, it only makes sense to try and save as much as possible in case I’m not able to later on in life. Kids are expensive. Emergencies will happen. Big travel plans will appear. Health will deteriorate. I want to work hard now while I’m young(ish) and able-bodied, because when I’m older I know I’d rather be doing anything instead of working for a pay cheque and worrying about money. :)

I’ve been giving a lot of thought to my 2014 goals, and since early retirement is still a priority for me, you’ll see that reflected in what I have planned for next year.

What does retirement mean to you? At what age are you looking to retire?

Looking towards 2014

Ever since I discovered NetworthIQ, I’ve religiously tracked my numbers every month. Sometimes I’ll browse through the profiles to see how others are doing, but mostly I keep track of my numbers for myself and for this blog. From the time I started up until today (8 years), my net worth has increased by over $110,000 (an average of approx. $14,000/year).

Now, that’s pretty good considering I have never been a high income earner. Before this year, my average gross annual salary (not including freelance/side income) for the last 8 years was around $45,000. And even when you factor in the freelance/side income, my average gross annual salary only increases to $53,000. 2011 was my best year when I earned just over $82,000. This year, I’ll hover between $75-80,000 when you add up my salary with my freelance income. That’s a comfortable amount to live on… but it’s not life changing.

networthiq

My net worth hasn’t increased enough for me to feel satisfied, and that’s mainly due to my retirement savings. In 2011, I had a consultation with a fee-only financial advisor (provided by the Toronto Star), who informed me that if I want to retire by my goal age of 55-57, I need to be saving a lot more aggressively than I have been. Unfortunately last year, I barely saved anything, and this year it’s been a struggle to get back on track. I’m earning less money than I did in 2011, so is early retirement still my number one goal? If so, then every other financial decision I make needs to reflect that fact. And if it isn’t my number one goal anymore, then what is?

This is what I need to figure out before I start tackling what I want to achieve for next year. I see next year as a pivot point to my finances (and my life). I’m finally settled down in Vancouver. I have a home and a steady job, and at my advancing age (yep, I said it) I don’t see myself dropping everything and moving abroad again or doing anything drastic anytime soon. Travel will always be a big part of my life, but I’ve already acknowledged the fact that I need to scale back. Even this year (where I was supposed to really slow down) was a bit excessive.

Right now I’m saving 10% of my gross annual income for retirement. It’s not enough. Based on my calculations, I need to be saving 18-20% of my gross if I want to hit my early age goal (without counting on CPP, OAS, or property). Since that doesn’t include other savings goals, this will mean making significant lifestyle changes, or increasing my income somehow. Likely both.

A lot to ponder over the next few weeks, that’s for sure.

Have you started thinking about your goals for next year?

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