In his new report, Mortgages or Margaritas: Is paying down debt putting your retirement at risk?,Mr. Golombek explains how paying down low-interest debt, such as a mortgage, can actually negatively impact your retirement savings.
The report illustrates the potential benefit of long-term savings in an RRSP/TFSA versus repaying debt under three different marginal tax rate scenarios. These use the same basic assumptions: $2,500 per year in extra pre-tax earnings, a 6 per cent long-term rate of return on investments in an RRSP/TFSA, a 3 per cent interest rate on a mortgage and a 30-year time horizon.
When the rate of return on investments exceeds the rate of interest on debt, investing (either in an RRSP or TFSA) is a better choice. If you expect your tax rates to remain constant, then you will have an equal benefit from either investing in an RRSP or TFSA. If you expect your tax rate to decrease upon withdrawal, then you will realize a greater benefit from investing in an RRSP than a TFSA. In contrast, if you expect your tax rate to increase upon withdrawal, then investing in a TFSA will yield a greater benefit than an RRSP.
If you are able to tolerate some risk in your investment portfolio and have a long enough time horizon before retirement, you may be able to realize a significant benefit by contributing to an RRSP / TFSA and skipping the extra payments on your low-rate debt.