There are more important things than saving for retirement.
Not many, but some.
Monday marks the deadline for contributing to a registered retirement savings plan and getting a deduction for your 2015 tax return. What a judgmental time of year this is. Smart people contribute to an RRSP or tax-free savings account, the narrative goes. If you don't contribute, there's an implication that you're negligent.
In fact, there are situations where saving for retirement can temporarily be downgraded as a financial priority. Here are six examples:
1. You're saving for a first house in an expensive city
It's fine to rent as long as you save aggressively at the same time, but lots of young people want houses. The minimum 5-per-cent down payment would cost about $31,500 in the Toronto area and $54,000 in Vancouver, and you can add thousands more for closing costs. That's a huge savings requirement and it won't leave room for retirement savings. You'll have to pick that up later. See the next point to understand what you'll be up against.
2. You're part of a maxed-out young family
Even with two working parents, the cost of carrying a mortgage, car payments, daycare and the rest of it can be overwhelming. Making your household budget work by ignoring retirement savings at this point in life is okay, as long as you understand that you'll need to backfill later on.
As your kids get older and daycare bills shrink, allocate the money to retirement savings. You'll have more latitude to postpone retirement saving as young parents if you can get your mortgage paid off in your early 50s and then pour money into your RRSP and TFSA after that.
3. You have credit card debt
If you're paying 20-per-cent interest on a credit card balance, no personal finance goal is more important than getting this debt paid off. If you're committed to not letting your card balance creep up again, there's even a case for taking money out of your retirement savings to kill a card debt.
This applies to balances on low-rate credit cards as well. They charge about 10 per cent – that's not actually low in today's world.
4. You have student debt
Low interest rates apply to student loans, but not as dramatically as they do for mortgages and lines of credit. Under the Canada Student Loans program, you either pay a fixed rate of prime (currently 2.7 per cent) plus five percentage points, or a floating rate of prime plus 2.5. A simple, logical progression for young adults is to pay off student debts, then decide on the financial priorities to come. Make sure retirement gets some consideration at this point. Jobs with company pensions are getting harder to come by for young adults starting out in the work force.
5. Your line-of-credit debt has become permanent
Use a line of credit to advance yourself money you expect to come your way in the near to medium term. Over time, the desired pattern for credit line use is long periods of a zero balance broken up by periodic drawdowns that last maybe a year or so at most. If you're carrying a perma-balance on your credit line, you're living above your means and you need to address this.
Cut your household spending and then crush the line-of-credit debt with money you were going to put in your RRSP.
6. You have no financial cushion
A recent Bank of Montreal survey suggests that one-third of people have withdrawn money from their registered retirement savings plans before retirement, and that buying a home and paying off debt were the top two reasons. I don't recommend withdrawing RRSP money through the federal Home Buyers' Plan, though I understand it because houses are expensive. But using RRSPs for debt repayment?
Stuff happens in life and sometimes you need to take exceptional measures like dipping into your savings for a retirement way off in the future. But you can protect yourself against this unfortunate outcome by keeping an emergency fund of at least a couple of thousand dollars. If you need to skip your RRSP savings one year to build an emergency fund, that's legit.
Rob Carrick