Women, and those of us between 18 and 34 in general, are less likely to have started saving for retirement, according to an annual RRSP survey conducted last year by Ipsos Reid for Royal Bank of Canada. I know there are a number of experts who will say "just get started," but what if you want to get started on something else - say, saving for or paying off a home or paying down debts? When does it make sense to press pause on retirement contributions to fund other equally important pots?
Bruno Malta, a fee-based investment adviser with Wellington West Capital Inc. provides a few different scenarios of when and why it makes sense to forgo retirement savings in the short term.
You have consumer debt
You should stop funding retirement and focus on debt reduction if you're carrying significant amount of high-interest consumer debt - 19 per cent interest on a credit card, for example. Funding an investment account with a long-term projection of 8-10 per cent on average simply doesn't make sense, according to Mr. Malta. He adds that we all have to run the numbers and put together realistic projections based on our individual situations. The returns we will realize from retiring our high-interest debt are likely to be much more attractive than the returns we are likely to see in our retirement accounts.
You're in the lowest tax bracket
Contributing to your RRSP lowers your taxable income, but if you're already in the lowest tax bracket, the benefits of putting money into RRSPs are simply not all that attractive. The higher your tax bracket, the greater the benefits of adding to your retirement savings account. Wondering which tax bracket you're in? Click here.
If you expect to earn a higher salary in the future, or are going to be in a higher tax bracket in retirement (you're currently a stay-at-home mom or will have a very lucrative pension plan), then funding a Tax-Free Savings Account will make more sense for you today.
You're having trouble saving 10 per cent of your gross income
"In your twenties and thirties, you are likely to undergo a number of life changes, from buying a house to getting married, so the two main goals, investment-wise, should be capital preservation and liquidity," says Mr. Malta. At least until you're making specific decisions about what your future is going to look like. "There are some people who will make the argument that the longer [money is in your retirement account] the more time it has to grow, but the idea of throwing a lot of money early on into a retirement savings account, when your time horizon in four or five years from now includes a home purchase or marriage, just doesn't make sense. He recommends putting away 10 per cent of your gross income into savings every month. Make your savings automatic.
If you are unable to do this, consider funding a savings account instead of your retirement account until you've acquired a sizeable rainy day fund that you are comfortable with. This strategy will allow you have adequate cash flow and provide some cushion for the future should anything unexpected happen.Try to determine what your major expenses might be in the next few years (much easier to do than determine your needs 20 years from now) and make this figure your goal point.
You're having trouble carrying a mortgage
"People might say, 'Why focus on paying down my mortgage when I'm paying such low interest rates?' But if you're having trouble making these payments at low rates, when the rates increase, you'll be out of the game quickly," says Mr. Malta. If you find your mortgage eating up so much of your take-home pay that you don't have much left for retirement savings, don't worry right now. If you're in your twenties, thirties and early forties, there is time to save for your retirement. If you have some savings in retirement, and a huge mortgage debt-load, it might be time to shift your focus on paying down your mortgage debt. Check out the RRSP versus mortgage calculator at empire.ca under the "goals and planning" section. If you focus your energy and your finances on reducing this major debt, you may be surprised at how quickly you can be mortgage-free. For added motivation, take a look at your amortization schedule. When you see how much of your regular payments goes toward interest and how much goes toward principal, you'll see that funnelling everything you can will significantly lower your interest costs.
You can't do it all, so don't get stressed out trying. Focus on one or two key parts of your overall plan, with the intention of building up your retirement nest egg down the road, when the time is right. Whether you're opting to put retirement savings on hold to funnel your money into other areas, it's always smart to talk to your adviser or consult a fee-for-service planner to find out the combination of contributions that is best for your age and your life stage.