Mortgages or Margaritas: Is paying down debt putting your retirement at risk?

The following commentary is courtesy of Renaissance Investments

Jamie Golombek, CPA, CA, CFP, CLU, TEP , Managing Director, Tax & Estate Planning, CIBC Wealth Advisory Services

The first two months of the year are known as “RRSP season” since the contributions you make to your RRSP up until March 2, 2015 allow you to claim a tax deduction on your 2014 tax return. For Canadians facing record levels of debt, however, contributing to an RRSP in 2015 may seem like a luxury they simply can’t afford this time around. The decision to pay down debt, at the expense of retirement savings, is often an emotional one that isn’t driven by the numbers. With mortgage interest rates at a 60-year low, neglecting your long-term savings in favour of debt repayment may result in sacrificing the quality of your retirement.


A recent CIBC poll2 asked Canadians whether, if extra funds were available, they would contribute to an RRSP or pay down debt. Surprisingly, 72% of respondents favoured debt repayment over retirement savings. The primary reason cited by the majority of those who preferred debt repayment was simply wanting the financial freedom of being debt free. This emotional rationale far outweighed other more practical reasons given by the respondents, such as concerns that interest rates may increase in the near future or that their current debt level was too high for comfort.

This confirmed the results of a previous CIBC poll3 that revealed 85% of Canadians were taking steps to reduce their levels of personal debt, even though only 16% were actually concerned that they had too much debt. The poll also showed that Canadians are trying to pay off their debt in a hurry, with more than 70% planning to be debt-free within five years.

So why the rush to pay off debt? It’s probably safe to speculate that market turmoil in recent years has caused investors to seek financial safety. And what’s safer than getting out of debt, right?

Not necessarily. When interest rates on debt are low, the short-sighted objective of getting out of debt now may actually negatively impact your long-term retirement savings.

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