If you’re a homeowner, you’re probably looking forward to the day you hand over that final mortgage payment. What an accomplishment it will be! Owning your home outright is an achievement that’s worth looking forward to and celebrating. It may be years or even decades away, but it’s a fantastic goal to work towards and — if you’re looking to downsize eventually — an excellent opportunity to capitalize on the appreciation on your original investment.
But as we age, we increasingly think about our needs for retirement: how much money we’ll have to save, how and where to save it, its preservation and growth potential, our level of taxation and more. We think about what we want to do when we retire, when we want to get there and how it will happen. And then, we wonder, should we be this focused on paying down our mortgage, or is saving for retirement the real priority?
These questions are important not just when we’re approaching retirement, but early on in our careers when we have time to strategize and execute a long-term plan. There are a number of variables to consider and no one-size-fits-all answer, so the personalized guidance of your Interior Savings Credit Union advisor is best. That said, we’re pleased to offer a brief overview of this topic to help get you started. If you have any questions, please contact us — we’d be pleased to hear from you.
What to consider and how to prioritize
Paying down your mortgage is an important part of your financial plan. So is saving for retirement. If you neglect either of these responsibilities, you’ll be in a difficult position later in life. Knowing this, the short answer to the question posed earlier is, “both.” Neither of these goals should be put on the back burner, as both are valid priorities. The real question is how to balance your attention to each.
How much you’ll put towards your retirement vs your mortgage comes down to a few deciding factors. First of all, how much mortgage debt do you have and when do you expect to have it paid off? Now, how does that timeline align with your plans for retirement? Your age and time horizon are critical factors in allocating budget toward retirement savings. It’s important to know whether or not you’ll be carrying a mortgage payment into retirement as this will affect your retirement income needs. Owning a home with a small mortgage may not be an issue in your retired years, but having a large mortgage can be more challenging. And in some cases, your retirement plan may involve selling your home and downsizing to a smaller, less expensive property (or even renting). This factors into your financial strategy as well, though your plan should be flexible and leave you with options. Your advisor can look at the specifics of your situation and offer guidance.
Secondly, what do you know about your sources of income in retirement? Do you (or your spouse) have a private pension plan through an employer? This will help determine your savings target to some extent. How much will you be able to draw from CPP if you start claiming this benefit at age 60, 65 or 70? Do you have a TFSA with significant savings, or expect to inherit a large sum of money from your parents? How much do you need to save in an RRSP to ensure adequate monthly income for the projected span of your retirement, plus a little extra for unexpected expenses? Remember, this isn’t just about lifestyle — you may find yourself needing medical care at some point, and possibilities like this should be worked into your financial plan.
Finally, what does your financial situation look like right now? Your financial plan isn’t just about the future — it’s about what’s possible and pressing today. If you’re carrying a mortgage but also have some consumer debt such as a personal loan or credit card balance, it makes sense to address that high interest burden as quickly as possible. Not all debt is created equal, and “good debt” vs “bad debt” is a very real thing. Think of it this way: even while carrying a substantial mortgage, you’re likely gaining equity as your home appreciates in value. The same theory applies to a Home Equity Line of Credit (HELOC) in most cases — if you’re carrying a reasonable balance at a low interest rate, it’s not the end of the world as your home remains a valuable asset. Now, carrying debt on an unsecured personal loan or credit card is another story. You aren’t gaining any equity and in fact, you’re losing money to high interest rates each and every month. This situation can be crippling in retirement. Paying off these high interest debts should be a top priority, and your advisor can help you identify the best way to approach your mortgage and retirement plan at this time.
The bottom line
Your mortgage may be the largest debt you ever incur, but it’s an important and valuable one that’s well worth the investment. Saving for retirement is absolutely essential to your future security and peace of mind, and it should not be put off while you focus on mortgage debt. The earlier you begin saving for retirement, the stronger your position will be, and one goal may help the other — for example, you may be able to aggressively pay down your mortgage while putting less towards retirement because your RRSP and/or other investments have ample time to grow. Consider speaking to an advisor to help determine how much of your budget should be put into each channel of your financial plan. At the end of the day, our goal is the same as yours: to help you achieve your dreams.
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