Retirement savings versus debt

In theory, we know what it takes to have a secure retirement: no debt, a contingency plan for emergencies and funds that will last longer than we do. Getting there… well, that’s that another story.

It’s hard to make decisions about money these days. The news isn’t encouraging: people aren’t saving enough for retirement, their wages aren’t keeping pace with increasing costs and they’re taking on record levels of personal debt. A report from Statistics Canada shows that one third of retirees over age 55 still have debt — as do nearly two thirds of workers age 55 and up. With less than stellar returns on savings and investments, some experts warn people should make paying off debt more of a priority — especially before retirement.

True, a break from savings can help get debt under control, but experts also warn we’re heading for trouble if we sacrifice our retirement savings for too long. With the RRSP deadline looming, many Canadians are wondering: Should I fund my retirement or pay down my debt? 

Conventional wisdom says to pay down debt first — after all, you’re likely paying more interest on your debt than you are earning in an RRSP or TFSA. However, the issue isn’t always so clear cut.

Here are some factors experts say you should weigh in your decision:

The health of your emergency fund

If you don’t already have one, experts say an emergency fund should be your first priority. During the height of the recession, many experts like Suze Orman started recommending people build emergency savings even while carrying debt.

What experts can’t agree on is the amount: Some say as little as $1000 is enough, while others recommend three to six months worth of expenses. The Government of Quebec even recommends people save six months of their salary before they focus on retirement savings. It advises to contribute to a TFSA first and only rely on other vehicles (like the RRSP) if the contribution room isn’t enough — though as of this January, we’ve all got $20,000 contribution room.

Ultimately, it’s up to you to decide how much of a buffer you need. Not only are you protecting yourself against taking on more debt in an emergency, you’ll also avoid touching your nest egg. (See Debt versus savings for more on this debate.)

The type of debt you have

Not all debts are created equal — there’s a big difference between a high interest credit card debt and a mortgage, for instance. Most experts agree that it’s best to get those credit card debts out of the way, especially if you’re paying upwards of 19 per cent interest per year. However, if you’re paying little or no interest on a car loan, you might be further ahead sticking to your retirement plan.

When it comes to other types of debts, experts note to look at the long-term costs as well as the monthly payment and interest rate. The Investment Education Fund recommends considering questions like how much does your loan cost now? Over the term of the loan, how much will you save by paying more now? How much could you potentially earn with an TFSA or RRSP? Is there a penalty for paying back your loan early?

Likewise, the tax deduction for interest on certain types of loans (like investment loans or student loans) needs to be considered as well. (And we haven’t even talked about inflation…)

What about a mortgage? A lump sum against your principle might not reduce your monthly payments, but it could help you pay off your mortgage sooner and cut your overall interest costs.

Paying off debt will also help you improve your credit score — which an RRSP won’t — and can give you a much needed sense of accomplishment.

How you’re saving for retirement

Just as you need to consider the various kinds of debt, you also have to look at the potential gains from different retirement savings vehicles. The main benefit of the RRSP is the tax refund — money you can then put towards savings or paying off debt. (However, you will pay tax on that money when you later withdraw it.)

With the TFSA, you won’t get the rebate now but you won’t have to pay tax on the contribution or the interest you earn. TFSA income also doesn’t affect your eligibility for OAS (for now, at least).

To add further confusion, you can hold different types of investments within an RRSP or TFSA — like stocks, mutual funds, bonds or GICs. A bond or GIC may not stand up to your debt interest, but growth in the stock market might. Unless you have a crystal ball, you might not want to take your chances — it’s possible to lose money too.

If you’re lucky enough to have an employer who matches your retirement contributions, you could be “leaving cash on the table” if you only focus on your debt. For instance, if your employer matches 50 cents on the dollar up to a certain amount it makes sense to max out that contribution room before paying off debt.

Your risk tolerance

Personal finance is as much about emotion as it is about numbers, and some people are more comfortable with risk than others. For example, if you think there could be a job loss ahead, paying off debt and building an emergency fund might help you sleep better at night. The tax rebate on the RRSP might be tempting, but you could pay penalties on top of taxes if you need to cash it out.

Likewise, some people find more peace of mind in paying off their mortgage as part of their retirement strategy. Some people might feel better splitting the difference — paying down debt and contributing to an RRSP. The riskier the investment you choose, the greater potential for gain or loss.

If you’re feeling indecisive, you might find compromise in a TFSA. If you end up not needing that extra cash cushion, you can withdraw it and put it into an RRSP — no need to pay extra tax.

How close you are to retirement

When it comes to retirement savings, we all know it’s best to save as much as possible as early as possible — and it’s harder to catch up later on. The long-term benefits of growth and compounding interest might give you pause about paying down debt at the cost of sticking to your retirement plan.

On the other hand, if you’re close to retirement you might want to get rid of any debts before you take that next step. However, that might not be the advice you give your children. Waiting to save for retirement until a student loan is paid off lessens the advantage of getting in early — especially if buying a home and raising a family could impact future RRSP contributions.

The economy

We can’t change it — we can only work with it. No one knows what the future holds in terms of market gains, but experts generally steer people away from these strategies:

1) Taking money out of your retirement savings to pay down debt. Unless you’re in financial distress, your retirement portfolio should be “hands-off” until you retire. Depending on your income, you may end up paying more tax on it now than you would in the future. In addition, many people’s portfolios still haven’t recovered from the recession and taking money out at a loss isn’t a smart solution.

2) Borrowing money to fund your RRSP. With many retirement vehicles earning pitiful returns, you might end up paying more than you’ll earn — especially if you can’t pay back the loan within a year. For many people it makes more sense to make payments to their RRSP in the following year rather than repaying an RRSP loan.

Still not sure what to do? Remember, in most cases experts recommend paying down debts first if the costs are higher than the returns you’ll see contributing to your retirement savings. However, everyone’s situation is different — the math may get tedious, but it’s important to run the numbers and find your ideal balance.

Here’s the good news: you increase your net worth whether you tackle the liabilities side of the equation (i.e. your debts) or increase your assets (savings). There are many things we can’t control — like market growth and interest rates — but we can aim to make the best decision possible with the information we have right now.

Additional sources:,, Sun Life Financial, TD Retirement, U.S. News Money