While retiring debt-free is a goal for many, with competing financial priorities such as saving for retirement, home ownership and the day-to-day living expenses, how do you make this dream a reality?
"While paying off your mortgage and debt before contributing to your RRSP may seem like the thing to do, it is not always realistic," says Jason Round, head of Financial Planning Support at RBC Financial Planning.
"It is best to find a balance between paying down debt and contributing to your RRSP, even when RRSP returns are lower than mortgage interest rates. The capital invested in your RRSP will produce compound interest in a tax shelter – creating a substantial nest egg for your retirement."
Round provides three tips to a debt free retirement:
• Understand tradeoffs – Recognize that while you may be contributing to your RRSP regularly, paying down debt will impact your savings.
• Set up regular RRSP contributions – Consider an automatic RRSP contribution to save while continuing to pay off your debt. The tax refund generated by RRSP contributions can be used to pay down debt.
• Restructure your debt – Start reducing your high-interest debt (credit card) then focus on managing low-interest debt (mortgage).
It is always a good idea to talk to a financial planner who can go through a financial review with you. A financial planner will provide advice to help you pay down debt while staying on track with your investments.
