Ask MoneySense: RRSP or mortgage?

When it’s best to invest in your retirement savings and when it’s best to eliminate debt.

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AskMoneySense_322Q: I will retire in five years and wonder if it would be best to put money towards my RRSP or throw it at my mortgage instead. —Kevin Byrne

A: Math and mindset are both big factors in the choice between investing in an RRSP or paying down mortgage debt. In today’s super-low interest rate environment the math tilts towards your RRSP. Here is a simplified example: If you put the money towards your mortgage you’ll earn a guaranteed “return” equal to your mortgage rate, say 3.5%. If you put the money into your RRSP and invest in a balanced portfolio you can reasonably expect long-term returns of about 5% to 6%. Plus, you’ll receive a tax refund that can either go towards debt repayment or right back into your RRSP (an especially powerful strategy if you’re in a high tax bracket).

Matthew Ardrey, a financial planner with T.E. Wealth in Toronto, says the RRSP advantage is even stronger if you’re in a high tax bracket. But he also wants to know what other sources of retirement income or assets there are: “You don’t want to be house rich and cash poor.”

So that is the math part of the decision. But the mindset part counts too. A return of 5% to 6% on your investments is by no means guaranteed, and the risk might be too much for you. Some people simply sleep better at night when they are plugging away at debt, especially as the retirement party draws near.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at ask@moneysense.ca.

3 comments on “Ask MoneySense: RRSP or mortgage?

  1. I think the 'math' is a little more complicated than this article makes it out to be and the fact that interest rates are at historic lows is probably a stronger argument for paying off the mortgage.
    1st, when is it better to pay down a mortgage? When interest rates are low and more of your payment goes to paying down the principal or when interest rates rise and less of the payment goes toward the principal?
    2nd, Interest rates are at historic lows, so where do you think interest rates will be in 3, 5 and 10 years – higher or lower? No one has a crystal ball, but I bet the odds are against 'lower'!
    3rd, if your answer to #2 is you believe interest rates will be higher in the future, are you so sure that RRSP investment returns will achieve 5-6% in a rising interest rate environment – each and every year?
    Finally, most answers to the 'Mortgage vs RRSP' questions do not incorporate the extra, out-of-pocket, interest expenses and investment costs that result by not paying down the mortgage and , instead, contributing to an RRSP.
    For most Canadians, paying off their mortgage first is the best answer. Here is a calculator that might help clarify the math behind this question. http://www.investingforme.com/classroom/account-t
    Here is an article that tries to answer this same question with a historical perspective – Should You Pay RRSP Or Mortgage? – RateSuperMarket http://www.ratesupermarket.ca/blog/should-you-pay

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    • Agree. Also, is it wise to retire with a mortgage and doesn't it seem like it's too late to invest in RSPs for the long-term if you're about to retire?

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  2. How come in these mortgage vs RRSP articles no one ever mentions that your mortgage is paid for in after tax dollars? This is very important as your 3.5% mortgage interest rate might be closer to 6.5% once you factor this in. This sure narrows the gap in which an RRSP results in better returns … not to mention one is a guaranteed return where the other is theoretical.

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