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 TFSA."
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 low-cost debt
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 mortgage.
"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||56%|
|Have too much debt right now and want to pay it off||20%|
|Interest rate on debt is too high||11%|
|Concerned interest rates on debt may increase in the near future||5%|
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 income||38%|
|Ensure I have enough funds to retire||24%|
|Interest rate on my debt is low so it's not costing a lot||14%|
|Can get a good rate of return on RRSP investments||11%|
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 to rounding.
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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