Retiring With Debt – Millennial Revolution

Hi everyone! We are still recovering from an exhausting travel week, which we will definitely share with you in future post, but now that we’re able to come up for air a bit, let’s do a reader case, shall we?

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Hi Firecracker:

I love your reader cases and hope you will find my case interesting enough to respond.

I am wondering when it makes sense to retire with a mortgage or line of credit or how many years I should be working before I can retire with manageable debt.

My goals are:

1) to enter early retirement to melt down my RRSP during my early retirement years up to age 65, leaving my TFSA untouched so that the RRSP portfolio is drawn down by the time that I hit 71 so that there is no OAS clawback

2) aim to pay off the bulk of my HELOC by the time I hit 65 with principal paydowns of $20,000 per year from capital gains from my non-registered investment portfolio

3) possibly finance my retirement from ages 65-71 to live off of OAS and TFSA and GIS if I qualify for GIS.  If it is not feasible to qualify for GIS, I will aim to start OAS and CPP at age 70 and continue to finance my retirement with RRSP withdrawals only.

Debts:

A) Here is my situation.  I am a 55 year old single mom with two grown children and live in a 3 BR townhouse. I recently rolled my outstanding mortgage of $233,000 into a secured home line of equity with a 4.95% variable interest with a current monthly interest only payment around $980. 

B) I have a P+0.5 investment loan of $200,000 which I pay interest currently at 5.7% (variable rate) at about $970 monthly.  Every year, once the portfolio gains more than 10%, I withdraw $20,000 to pay down my mortgage HELOC. 2022 and 2023 were years where I had no redemptions due to the market fall.  I have already made my annual $20k redemption earlier this year.

I have no other debts other than the $233k HELOC and $200k investment loan.

I max out my RRSP every year (currently 10% is in a group RRSP plan with 5% contribution and 5% company match)

My annual gross salary is $100,000 (with a net monthly income of about $5800).

Spending:

My $3,150 fixed monthly expenses are allocated as follows: 

            -$1000 mortgage HELOC

            – $415 condo fees

            – $225 property tax

            – $90 home insurance
            – $150 utilities

            – $130 internet/phone

            – $170 life insurance

            – $970 investment loan interest

The remaining $2,650 net pay goes towards monthly variable payments:

– $583-$833 donations (~10% of gross income, so lower during early retirement years)

            – $817-$1067 groceries, transit and miscellaneous spending

            – $1000 for RRSP/TFSA/savings

 My portfolios as at June 2025:

1)         $849k RRSP (stocks, preferred shares, index funds, mutual funds, ETFs) – RRSP room maxed out annually

2)         $209k TFSA (stocks, preferred shares, REITs, index funds, mutual funds, ETFs) – with about $24K available TFSA room left for 2025.

3)         $220k non-registered portfolio (mutual funds) with a 5.7% interest rate.  The $11,400 annual interest rate would be tax deductible. I expect to continue paying interest on the investment loan of $200k indefinitely for tax deductibility to offset the RRSP/RIF income during my early retirement years up to age 65 where I remain in the same tax bracket because I still have ~$2k monthly interest expense on the mortgage HELOC  and investment loan.

My portfolios are fairly aggressive – I aim towards annual growth of 10% for each portfolio (with about 2% coming from annual RRSP contributions).

I currently also have about $65k in high interest savings account (to cover at least one year of living expenses) that I top up monthly ($1000) and then withdraw to contribute towards my RRSP or TFSA portfolios as required, as well as to pay for unexpected repairs, vacations and increase in interest rates.

My guess is that if I enter early retirement, my $1000 monthly savings would drop off and I would need $4800-$5000 a month to finance my current lifestyle,

Accordingly, I would have to continue working to grow my current $1,058,000 combined RRSP and TFSA portfolio to somewhere around $1.3-$1.7M target which would take approximately 3-5 years at 10% return (including the $18k annual RRSP contributions) and then once I hit the target, I expect I will need to withdraw about $48k from RRSP/RIF and $20k from capital gains to net around $58,972 annually ($4900 monthly) to cover my living expenses and pay down the principal on the mortgage HELOC for the next year.  As I continue to pay down $20k annually, I would save an additional $990 annual mortgage HELOC interest (at current 4.95%) every year, giving me some breathing room and hopefully have the $233k HELOC paid off in 10 years by the time I am 65 (or during market downturn years, where I may not be able to redeem $20k from my non-registered account to pay down HELOC principal) at least have a relatively small outstanding HELOC.

Is this a feasible goal plan – to enter into retirement with a (mortgage) HELOC while staying with the relatively same income tax bracket.  I think that if I continue working to age 65 until the HELOC is completely paid off, while maxing the RRSP contributions for tax deductions, my RRSP portfolio will grow too big and result in OAS clawbacks, so it might make sense to take early retirement and not have leave a taxable large RRSP to my estate, while allowing my TFSA portfolio to grow.

I believe that I can sell my townhouse (worth about $950k) and be free of bad debt.  However, I live in a suburb near Vancouver, where rent prices are high and not a lot of vacancies available, where a 3BR townhouse rents for around $3500 at least, and I am currently paying half that in housing costs.  This might be an option 10 years later down the line once my two children are “launched”, but my concern is whether it is feasible to retire soon and not 10 years down the line where the RRSP could potentially more than double from $849k to over $2.2M. It seems to make sense to melt down the RRSP earlier if I have enough RRSP/TFSA/savings to fund my current lifestyle and not run out of money before I run out of time due to sequence of returns risks.

If you have any further questions, please let me know.

Sincerely,

Pyrophobia

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First of all, let me just say that WOW to any single mom that’s successfully raised two kids without killing herself. We are two FIRE people raising one kid and we’re barely hanging on most of the time, so Pyrophobia is a superhero in my book right off the bat.

This reader case jumped out at us because they’re using a tool to get to FIRE that we try to avoid at all costs: debt.

Debt is not something we’ve used during our investing journey, and that instinct has served us very well. But at the same time, lots of people (especially real estate investors) have built their fortune using debt. So what’s an OK amount of debt, and how do you use it safely?

Here’s our take. From a FIRE perspective, the best amount of debt is no debt at all.

Debt can be used as a temporary measure to get to some goal, but I don’t buy the whole idea of permanently being in debt as an investment strategy at all.

Personal finances are confusing enough as it is, and if you read through the above email and got confused, you’re not alone. Debt has this way of obfuscating how much money someone actually has, and a mistake when calculating your FIRE portfolio can be catastrophic if you quit before you can actually afford it.

HELOCs, or Home Equity Line of Credits, are loans taken out on the value of your residence. These are often used by home owners who want to have their cake and eat it too. Real estate tends to lock up a majority of your net worth, but if your take out a HELOC, you can use that equity to invest in the stock market. Plus, your interest costs are tax deductible! Win-win, right?

Here’s the thing. HELOCs, unlike mortgages, are always variable rate loans. The math looks great when interest rates are low, because you can take equity out of your home, deduct the interest costs on your taxes, and invest it in the stock market. As long as your investments perform better than your after-deduction interest costs, then you’re making money! What’s not to love?

But what if those investments aren’t performing? What if the stock market is going down? And on top of that, what if interest rates are shooting up? Then your interest costs are increasing, while your investments are decreasing. That’s a recipe for disaster.

And don’t say that’ll never happen, because it just did. In the post-pandemic period, inflation shot up because world governments were printing money to stave off a wider economic calamity, which caused the cost of everything to go up. Central banks raised interest rates to combat this effect, which caused everyone holding variable rate debt to get screwed. Using permanent debt as a strategy to get to FIRE really didn’t do well in this scenario.

So what should Pyrophobia do? To find out, let’s MATH SHIT UP!

Debt: What Is It Good For?

When it comes to FIRE with debt, there are two different groups: Those that need debt to make their numbers work, and those that don’t. The first group is obviously much worse to be in than the second, so let’s figure out which group our reader is in.

Let’s pretend that Pyrophobia pays off all their debt right now. To recap, here is where they stand:

Summary	Amount
Income	$100,000 gross, $69,600 net
Expenses	$5000 a month, $60k a year
Investible Assets	$849k (RRSP) + $209k (TFSA) + $220k (taxable) + $65k (HISA) = $1,343,000
Home	$950k * (0.95) = $902,500 after real estate agent fees
Debt	$233k (HELOC) + $200k (Investment Loan) = $433k

On the surface, you might think that her assets ($1,343,000) minus her debt ($433,000) would make her net worth $910,000. With expense totalling $60,000 per year, and as per the 4% rule, a FIRE target portfolio of $60,000 x 25 = $1,500,000, she would still be a ways off from her target.

However, a big portion of her expenses comes from servicing that debt, to the tune of $1970 per month, which would go away if her debt were paid off. Once that happens, her expenses would drop to $5000 – $1970 = $3030 per month, or $36,360 per year, assuming she keeps the house. This requires a FIRE portfolio of $36,360 x 25 = $909,100 to support, and guess what! Her net worth after paying off her debt of $910,000 just beats this target! Later on, if she wants to downsize the house after her kids move out, she can unlock the equity and increase her net worth to make her retirement even safer.

In other words, she doesn’t need debt to retire. She can retire without it, and by paying it off, she can eliminate this vulnerability to rising interest rates!

Payoff Strategy

Let’s talk about her payoff strategy. It sounds like because of non-financial reasons (i.e. two kids still living with her), she’s not quite ready to launch into retirement yet. That’s fine, because it gives us some time to figure out the best way to unwind all this debt.

Her current expenses are $4800/month or $57,600/year outside of Savings/RRSP/TFSA. With an net salary of $69,000, she can put up to $11,400/year towards her debt until she’s ready to quit her job, at which point, she can just pay it off and significantly reduce her expenses to reach FI.

Until then, she should keep maxing out her RRSP, because that’s free money from the government in tax savings, and focus any after-tax savings, redirected charitable donations, and opportunistic capital gains towards the investment loan. Investment loans are the best target for your debt repayment because a) it’s a higher interest rate and b) it’s more likely to be called. Investment loans can be called at any time if markets drop suddenly. You don’t want to be in a situation where this happens, because it can force you to sell at the worst possible time, so this is the loan you want to pay off first.

Having a HELOC is far safer since it’s tied to the value of the house rather than the value of the stock market, so it’s less likely to be called. After that, target the HELOC.

This should generate a snowball effect because as her loan balances go down, interest payments will drop off her expenses, which will free up even more money to pay down debt, and so on. Once her debt balances have been fully paid off, she should be able to retire in a much safer way.

Conclusions

Debt can be a useful tool in building wealth, but it must be used extremely carefully, and only as a temporary measure rather than as a permanent part of your life. Early retirement is all about freedom, and if you’re in debt, you aren’t ever truly free.

What do you think? Should Pyrophobia pay down her debt, or do you think debt can be a permanent part of an early retiree’s portfolio? Let’s hear it in the comments below!