It's also better to start saving for retirement early, so you can reap the benefits of compound interest over a longer period of time. As a general rule, the younger you are, the more you should prioritize your retirement savings over your mortgage.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
Typically, you want to put your money where it will give you a higher expected rate of return. Since the long-term market return has been higher than the mortgage rates for a while now, investing makes more sense – that is, if we only look at the numbers.
Making an RRSP contribution can potentially reduce the amount of tax you will be subject to pay on your income tax return. The way an RRSP works is that it helps you save for the future while deferring tax. The amount you contribute to your RRSP is deducted from your taxable income in the year of the contribution.
Focusing on your RRSP when you're not earning much isn't ideal since the tax break is minimal. It's possible that when you withdraw the funds in retirement, you'll have a higher income than you do today. In that case, you'd actually be paying more taxes on that RRSP money than you would today.
December 31 of the year you turn 71 years old is the last day that you can contribute to your RRSPs.
In Canada, the average amount held in RRSPs by retirement varies depending on the region but the national average is $141,923 as of 2021. This has gone up from $112,295 in 2020. Every year more and more Canadians are starting to invest in their future.
To retire by age 67, experts from retirement-plan provider Fidelity Investments say you should have eight times your income saved by the time you turn 60. If you are nearing 60 (or already reached it) and no where close to that number, you're not the only one behind.
Max It Out
You don't need an RRSP for retirement as long as you can find around $100 per week to maximize your TFSA each year.
When should you not buy RRSPs? If your income is too low and you will not benefit from the tax deduction. Some suggest that if your income is below the first upper threshold of the lower marginal tax bracket, an RRSP may not make sense. This is about $48,500 of taxable income.
When you pay down your mortgage, you're effectively locking in a return on your investment roughly equal to the loan's interest rate. Paying off your mortgage early means you're effectively using cash you could have invested elsewhere for the remaining life of the mortgage -- as much as 30 years.
Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest. But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead. Before making your decision, consider how you would use the extra money each month.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
If you want short term savings (for travel or new vehicles), a TFSA is better than paying down your mortgage. For this type of saving, you should probably use lower risk investments like high interest savings accounts or term deposits.
At age 40, you should have saved three times your annual salary, and this increases to 4× your income just about the time you hit that age that defines mid-life or “midlife crisis”.
How Much RRSP Should You Have at Age 40? You should have two times your annual income in retirement savings by age 40.
How Much RRSP Should You Have at Age 50? At age 50, you should have about five times your annual income in retirement savings.
If you retire with $500k in assets, the 4% rule says that you should be able to withdraw $20,000 per year for a 30-year (or longer) retirement. So, if you retire at 60, the money should ideally last through age 90. If 4% sounds too low to you, remember that you'll take an income that increases with inflation.
Can I retire at 60 with $200k? At 60, you can more easily retire on $200,000, especially if you plan to start taking Social Security at 62. But keep in mind that when you take the earliest Social Security option, you dramatically reduce your monthly payout for the remainder of your life.
Can I retire at 60 with $800k? Yes, you can retire at 60 with eight hundred thousand dollars. At age 60, an annuity will provide a guaranteed level income of $42,000 annually starting immediately, for the rest of the insured's lifetime. The income will stay the same and never decrease.
According to Canadian household debt statistics, 34% of homeowners have mortgage-free properties.
But if you can supplement your retirement income with other savings or sources of income, then $6,000 a month could be a good starting point for a comfortable retirement.