It's Your Money  

Balancing debt repayment and retirement savings

Debt and retirement

The balancing act between debt repayment and retirement savings has become more critical than ever now that we are in a higher inflation and higher interest rate environment.

With the potential to impact both short-term financial stability and long-term retirement plans, Canadians must adopt a well-informed approach to strike the right equilibrium between these two financial priorities.

Here’s some tips to help you strike the right balance between these two competing priorities:

1. Assess your financial snapshot - Before making any decisions, take a comprehensive look at your financial situation. Evaluate your current outstanding debts, interest rates, retirement savings, and overall budget. Create a clear picture of your financial obligations and future goals. This assessment will serve as a foundation for determining how to allocate your resources effectively.

2. Prioritize high-interest debt - With rising interest rates, focusing on high-interest debts should be the top priority. Debts with interest rates exceeding potential investment returns should be tackled first. Paying down credit card debt, personal loans, or high-interest lines of credit can save you significant money in the long run and free up more funds for retirement savings.

3. Embrace the Debt Avalanche or Snowball Method - Consider employing popular debt repayment strategies like the debt avalanche or debt snowball method. The debt avalanche method involves prioritizing debts based on their interest rates, targeting the highest interest debt first. On the other hand, the debt snowball method focuses on paying off the smallest debts initially to build momentum and motivation. Choose the strategy that aligns with your personality and financial circumstances.

4. Balance debt repayment and retirement contributions - While addressing high-interest debts is crucial, it's equally important not to neglect retirement savings. Striking at least some balance is key. Aim to contribute at least enough to your retirement accounts to take advantage of employer matching programs or tax benefits. Maximizing employer contributions can significantly boost your retirement fund while maintaining focus on debt repayment.

5. Leverage tax-efficient strategies - Explore tax-efficient strategies that enable you to simultaneously manage debt and save for retirement. For instance, consider contributing to a Registered Retirement Savings Plan (RRSP) to benefit from potential tax deductions. The tax refund received can be allocated toward debt repayment. This approach optimizes your financial efforts by addressing both retirement and debt obligations.

6. Consider the impact of inflation - Inflation erodes the purchasing power of money over time, impacting both debt and retirement savings. While aggressively repaying debt is important, investing in assets that outpace inflation can also be advantageous. Diversified investments like stocks and real estate have historically provided better protection against inflation. Consult a financial advisor to create a balanced investment strategy that considers inflation and its effects on your finances.

7. Review and adjust regularly - The dynamic nature of the financial landscape necessitates regular reviews of your debt repayment and retirement strategies. Set aside time annually to assess your progress, adjust goals if needed, and ensure that your financial plan remains aligned with your evolving circumstances.

8. Seek professional guidance - Navigating the complexities of rising interest rates, inflation, debt, and retirement planning can be overwhelming. Seeking advice from a qualified advisor can provide invaluable insights. A Certified Financial Planner (CFP) can help you create a customized plan that addresses your specific financial situation, goals, and risk tolerance, ensuring that you make informed decisions that will positively impact your financial future.

Balancing debt repayment and retirement savings in the face of higher interest rates and inflation requires a strategic and informed approach. Consulting a CFP professional can provide you with the guidance and expertise needed to navigate this intricate landscape successfully.

By adopting a well-balanced approach, Canadians can work towards securing their financial stability and future retirement with confidence.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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