Pay Down Mortgage or Save for Retirement?

by David van Berkel, BBA, CFP^®, CKA^®, CPCA^®

Financial Planner - Christian Credit Union, Aviso Wealth

Christian Credit Union’s Spring campaign this year focuses on promoting our personal mortgage products. At the same time, we are also encouraging the use of the new First Home Savings Account for those looking to buy their first home in the coming years.

As a financial planner, a question I often get asked is – Do I focus on paying off my mortgage debt, or on saving for retirement? What is the more important priority? And without wanting to sound cliché, I usually answer by saying that it depends, or that maybe you should do both.

Personal debt is certainly something we should focus on eliminating, especially more expensive debt aside from your mortgage. In general, mortgage debt is the least expensive debt you will incur.

There’s also the matter of long-term goals. Our future retirement is something that we need to financially prepare for. The earlier you begin to do that, the easier it will be for you.

Wondering what strategy is best for you?
Here are several things to consider.

1. How long do I have until retirement?

As mentioned, it’s always a good idea to start early. Why? Because the earlier you start, the more your retirement savings will grow. This is thanks to compound interest.

For example, let’s say you contribute $2,500 per year into a Registered Retirement Savings Plan (RRSP) utilizing a growth portfolio earning an average annual rate of return of seven percent. In 25 years, you’ll have an RRSP balance of just under $160,000 (a nice sized retirement nest egg). Your actual net invested will have only been $62,500. That’s $100,000 of free money.

2. Am I in a high marginal tax rate?

The real value of an RRSP is getting a tax refund from the contribution that you make. True, it’s taxable later in retirement. But almost always at a marginal tax rate that is one or two rates lower, sometimes even more.

For example, let’s say your income is over $55,867 this year. Your marginal tax rate being 30.50%, means you will get almost one-third of your RRSP contribution back as a tax refund. If your income is over $111,733, your marginal tax rate is 36%. An even better refund that can be put towards paying down your mortgage. See, we’ll get you doing both!

With the ability to split income with your spouse in retirement, you’ll likely be in the 25% marginal tax rate, a tax rate that can be 40 to 50% lower than the tax rate in your working years.

3. Is my mortgage debt costing me less than what my RRSP could earn?

If your RRSP is in a mutual fund investment that is invested in a ‘Growth’ to ‘High Growth’ investment, you can be certain that over the long term it will earn far more than you pay in mortgage interest. Interest rates on mortgages have risen to 5% or more, while the long-term average rate of return on a ‘Balanced’ or ‘Growth’ portfolio can well exceed that.

Still not sure what strategy best suits you? Do you want to ask about the First Home Savings Account? An Aviso Wealth advisor at Christian Credit Union can help you navigate your financial needs and point you in the right direction.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.