Ask MoneySense: RRSP or mortgage?

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.

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