LANTZVILLE, BC, Jan 11, 2014/ Troy Media/ – One of my favourite quotes is Albert Einstein’s definition of insanity. Insanity, he said, was simply doing the same thing over and over again and expecting different results. If this definition holds true, then maybe it’s time for a saner mortgage-before-RRSP strategy. Why?
Well, here are a few scary numbers that help to demonstrate why the current RRSP-before-mortgage strategies are not working.
- 50 per cent of Canadians, aged 50 to 59, still have a mortgage.
- 51 per cent of Canadians expect to carry a mortgage into their retirement.
- 50 per cent of Canadians believe they will run out of money 10 years into retirement.
- 73 per cent of Canadians do not expect to retire until age 67 or older.
- 47 per cent of Canadians, aged 55 to 64, have never saved at all for retirement.
These numbers demonstrate to me that the current strategies that put RRSP savings ahead of debt reduction is not working for the majority of Canadians.
And as I discussed in my previous column, when it comes to the debate about contributing to an RRSP or paying down the mortgage, it’s well worth your while to think outside the box (what we called the 3rd strategy) from the investment world’s standard plans and instead pay down your mortgage first. The numbers say it all, as we showed you!
But if you needed anymore prompting in this debate to pay off your mortgage first instead of contributing to your RRSP, here are a number of other benefits to this strategy for you to mull over:
- You have focused on your most valuable asset – your home. Your principal residence is your most valuable asset because it increases in value tax-free but, unlike rental properties, expenses like your mortgage interest cannot be deducted from your taxable income. So, if you pay your lender less in mortgage interest you are actually putting more after-tax money in your pocket. That $82,786.08 you saved by paying off your mortgage early is actually $82,786.08 in after-tax money in your pocket.
- Life is easier with nothing to invest. By not contributing to an RRSP, not only did you save over $17,000.00 in out-of-pocket investment expenses, but also your life just got easier. With no savings in RRSPs to invest and manage, you just saved yourself 18 years of investment meetings, 18 years of watching the value of your savings rise and fall in good and bad markets, and 18 years of stress and worry as you learn, through the school of hard knocks, all about the good investments and the not so good investments.
- With age comes wisdom (hopefully). Successful investing is a learning process. Gaining investment experience is important, but when you start at a young age it can be costly. Young investors take greater risks than older investors. They are much more accepting of losing money on their investments than older investors and do not place enough importance on those losses. Simply, as we get older, gain life experience and get closer to that magical retirement date, our attitudes about investing and the investments we select are different. We often make better investment decisions in our 40s and 50s than we do in our 20s and 30s.
- Life is better when you own your home. For those of you who own your home free and clear, you already know what I mean. Your stress level goes down, money problems are much smaller, family squabbles about money diminish, you don’t worry about your job security as much and you feel freer and lighter on your feet. Man, there is nothing better than when those mortgage payments stop going to someone else and instead start landing in your own account.
- Saving for retirement just got easier. By not contributing to an RRSP you just accumulated 18 years of contribution room and at 48 years of age your income is probably a lot higher (you’re paying a lot more in income taxes) than it was in your 20s and 30s. What a great opportunity! Now that you’ve paid off your mortgage, you have $24,274.64 each year to help build your retirement nest egg. Best of all, all of that accumulated RRSP contribution room gives you the flexibility to manage your contributions so you minimize your income tax payments, regardless of your current income today. If you wait and start saving for retirement at 48 years of age, investing $24,274.64 and earning a return of 7.49 per cent, each year, you would have accumulated over $446,000.00 by your 60th birthday and over $782,000.00 by the time you reached 65.
- Helping your children attain their goals is now possible. The cost to attend college or university keeps rising each and every year. The majority of parents have not saved enough to cover all of the costs and students are graduating with record levels of student debt. Paying off your mortgage early gives you the financial resources to correct this underfunding if that’s what you choose to do. With no mortgage payment and over $24,000 available cash you’d have the ability to not only help your children get that higher education, but they could do so debt free. What a great start – educated and debt free!
- The timing might be perfect. When is the best time to pay down your mortgage? Answer: Before interest rates begin to rise. That way, more of your extra payments will go directly to the mortgage amount you owe, thereby reducing your mortgage faster. So, think about how low mortgage interest rates today (5.34 per cent) and where they are forecast to be in the future (6.63 per cent) – maybe higher. So now might just be the perfect time to switch strategies.
When it comes to the debate over RRSP contribution or mortgage payment, don’t be too quick to disregard the out-of-the-box strategy. Just because your lender or financial advisor doesn’t offer it as an option for your hard-earned savings doesn’t necessarily mean it isn’t right for you and your family. Their silence could simply mean that it’s not right for them – losing all that extra interest and investment fee revenue for them and their company.
George Christison is one of the founders of InvestingForMe, a financial resources website dedicated to helping Canadians make better saving and investing decisions, with greater confidence.
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