Two new reports came out today that show Canadians may be focusing more on debt reduction than retirement planning.
A Bank of Montreal survey found that 80% of young Canadians are more focused on debt reduction than savings but have little confidence that they will have enough money for retirement. And with the recent RRSP contribution numbers just released by Statistics Canada showing that the median RRSP contribution in 2011 was only $2,830 and that less than 1 in 4 taxpayers made an RRSP contribution last year, it’s no surprise that people are worried that they will outlive their retirement savings.
The take away from the article, according to the Bank of Montreal, is that it’s critical to start saving for retirement at an early age. But is that the case? Focusing on paying off debt early is also a good thing. With a tight job market for recent graduates, high student loan debt and the high costs associated with entering the housing market, it is no wonder that younger Canadians are concerned about their debt levels before their retirement. The security of having a good education that will eventually lead to a well paying job appears to be a thing of the past, at least for now.
What is your priority – pay off debt or build your RRSP savings? Here are some considerations:
- How expensive is your debt? If the debt you are carrying is primarily high cost credit card debt then paying that off should be your first priority, even over retirement savings. Carrying a debt burden that holds an 18% or more interest cost will keep you in debt for years – costing you future potential RRSP savings.
- What is your income level today? If you are not yet in your prime earning years then paying off debt now makes sense for two reasons. First you probably don’t have a lot of surplus cash flow right now so reducing your debt early will reduce your interest costs, and your total monthly debt payments. This will free up cash flow down the road that you can apply to your RRSP savings. Second, if you are relatively young and your income low, your potential tax refund may not be as financially beneficial as the savings associated with paying down your debt early.
- Contributions made in the last 12 months will be seized if you have to file bankruptcy. While your existing RRSP savings are protected in a bankruptcy, any contributions you have made in the last 12 months are not. If your debts are currently out of control, it may make more sense to talk to a Trustee in Bankruptcy about your debt reduction options before you make that contribution. The funds you have available may be more wisely used in a Consumer Proposal settlement with your creditors. Once you deal with your debts, then you can begin to save for your retirement in earnest.
Does this mean you have to wait to save for your retirement until you are debt free? No. But if your current debt levels are starting to get out of control, then you should consider talking to a Trustee in Bankruptcy to see how you can put your debts behind you, so you can put your retirement in front of you.
Contact us today at 310-PLAN, we can help you decide.