New CIBC poll finds most Canadians just aren't doing the math when it
comes to balancing debt levels and saving for retirement
TORONTO, Feb. 19, 2015 /CNW/ - A new CIBC (TSX: CM) (NYSE: CM) poll finds that nearly three-quarters (72 per cent) of Canadians would choose paying down debt over adding to their
retirement fund, a trend that might look good but could actually be
costing them tens of thousands of dollars, says Jamie Golombek,
Managing Director, CIBC Wealth Advisory Services.
"The decision to pay down debt at the expense of retirement savings is
often an emotional one that isn't driven by logic," says Mr. Golombek.
"You may not be doing yourself any favours by rushing to pay off your
home while mortgage rates are at rock-bottom levels. If you're able to
take some risk in your investment portfolio, you might be tens of
thousands dollars richer by investing any extra money in an RRSP or
The poll found that an emotional need in the Canadian psyche to be free
of debt outweighed more practical considerations for reducing debt,
such as concerns over carrying too much or rising interest rates. These
findings are consistent with previous CIBC polls that found paying down debt is the top financial priority for Canadians
in 2015 for the fifth straight year and 85 per cent of Canadians are taking steps to reduce their personal debt levels with as many as 71 per cent
planning to be free of debt within five years.
Key poll findings include:
72 per cent of Canadians favoured debt repayment over contributing to an RRSP if
they had extra funds available
56 per cent say they want the financial freedom of being debt free
20 per cent say they have too much debt and want to pay it off
Only 11 per cent say they think it's better to repay debt than invest in an RRSP because
the interest rate on their debt is too high
75 per cent of women will use the extra funds to help pay down debt compared to 69 per cent of men
74 per cent of those aged 35-54 - those in their prime income-earning years - think
it's better to repay debt with extra funds than to invest in RRSPs
The findings support earlier research by CIBC Deputy Chief Economist Benjamin Tal that found Canadians are
taking advantage of current low interest rates to pay down $11 billion
more a year in principal on their mortgages than previously thought.
Bigger benefits from investing in an RRSP or TFSA than paying off
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.
At a marginal tax rate of 30 per cent - both at the time an RRSP/TFSA
contribution is made and withdrawn - if the funds were invested, the
individual's net worth would increase by $146,700 after 30 years. But,
by using the funds to repay mortgage debt, the benefit would be only
$85,800. "In this example, you would be $60,900 further ahead in 30
years time by investing in an RRSP or TFSA every year, assuming a
constant tax rate," says Mr. Golombek.
"In reality, however, many Canadians expect to be in a lower tax bracket
in retirement, which can mean even greater benefits from an RRSP
investment," Mr. Golombek added. For example, if you have a 30 per
cent marginal tax rate today but expect it to fall to 20 per cent by
the time you withdraw RRSP or TFSA funds, the RRSP investment benefit
climbs to $167,600, while the TFSA benefit remains at $146,700 and the
debt repayment at $85,800. That makes the RRSP investment the better
choice, he says.
If your marginal tax rate in retirement is expected to be higher than
when you contribute to an RRSP/TFSA, say 40 per cent, compared to the
current 30 per cent rate, investing in TFSAs is more attractive than
RRSPs, says Mr. Golombek.
Mr. Golombek notes that investing in the bond or equity markets as you
might do within your RRSP/TFSA can't be directly compared to paying
down your mortgage, which is more similar to a risk-free investment
such as a Government of Canada bond.
If you have a high level of debt and would not be able to sustain an
increase in mortgage interest rates, it might be best to minimize your
risk and simply focus on debt repayment, says Mr. Golombek. But if
you're able to tolerate some risk in your investment portfolio while
saving for longer-term goals, choosing to invest via an RRSP or TFSA
may result in more money at the end of the day, albeit with an
assumption of greater risk.
"When the rate of return on investments exceeds the rate of interest on
debt, investing either in an RRSP or TFSA is the better choice," he
says. "If you're able to tolerate some risk in your investment
portfolio, consider whether you should focus some of your financial
resources on increasing your retirement savings via an RRSP/TFSA,
instead of putting everything towards paying off your low-rate
"Of course, if you're holding high interest debt, paying that down is
almost always the best choice."
Additional poll findings:
The main reason Canadians think it would be better to pay down debt
rather than invest in an RRSP:
Want the financial freedom of being debt free
Have too much debt right now and want to pay it off
Interest rate on debt is too high
Concerned interest rates on debt may increase in the near future
The main reason why Canadians think it would be better to invest in an
RRSP than pay down debt:
Take advantage of the tax benefits of RRSPs, like reducing taxable
Ensure I have enough funds to retire
Interest rate on my debt is low so it's not costing a lot
Can get a good rate of return on RRSP investments
From January 23 to 25, 2015, an online survey was conducted among 1,508
randomly selected Canadian adults who are Angus Reid Forum panelists.
The margin of error - which measures sampling variability - is +/- 2.53
per cent, 19 times out of 20. The results have been statistically
weighted according to education, age, gender and region (and in Quebec
language) Census data to ensure a sample representative of the entire
adult population of Canada. Discrepancies in or between totals are due
CIBC is a leading Canadian-based global financial institution with
nearly 11 million personal banking and business clients. Through our
three major business units - Retail and Business Banking, Wealth
Management and Wholesale Banking - CIBC offers a full range of products
and services through its comprehensive electronic banking network,
branches and offices across Canada with offices in the United States
and around the world. You can find other news releases and information
about CIBC in our Media Centre on our corporate website at www.cibc.com.
SOURCE Canadian Imperial Bank of Commerce
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Media contact: Caroline Van Hasselt, Director, External Communications and Media Relations, at 416-784-6699 or e-mail: firstname.lastname@example.org.