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Balancing act: How to save for retirement while paying down debt

5 minute read

middle-aged Asian couple sitting on the living room couch looking at their financial documents

While the ideal scenario is to be debt-free in retirement, carrying a mortgage and some debt into retirement is the new normal—34% of Canadian retirees over 55 hold some debt.

With debts looming, Gen Xers may wonder if they can save enough to retire. But there is good news: if you’re still earning and learning, you still have time.  

So, how can retirement still be possible if you’re in debt? And how can you balance saving for retirement while paying them down?  

Not all debt is created equal

If you have significant consumer debt—debt incurred by purchasing goods—on a high-interest credit card or loan, that has to go. The average Canadian aged 46-55 has over $30,000 in consumer debt.

Raising your monthly payment can have significant impacts. Let’s say you’re carrying $5,000 on a credit card at 20% interest—here’s how monthly payments impact how long you’ll be carrying that debt:

  Minimum payment method  Static monthly payment  Accelerated bi-weekly payments  Increased monthly payment 
Payment 2.5% of balance, calculated at time of payment $150 per month  $75 every two weeks $250 per month
Years of payments 30.75 4.2 3.5 2.1
Total interest paid $9,464.65 2,359.08 $1,992.50 $1,133.05
Total cost of borrowing $14,464.65 $7,359.08 $6,992.50 $6,133.05

If you can reduce your retirement savings contributions to pay off high-interest debt, you’ll almost always see greater returns by investing the difference after the debt is paid. You can also save money by consolidating your debt to a lower-interest loan, reducing your total payments and borrowing costs.

Calculate your own cost of borrowing with the Government of Canada’s credit card payment calculator.

This plan only works if you limit further debt accumulation. Examine spending habits to see where you can make changes.


Understanding rates of return 

You should pay off lower-interest loans—which may include previously consolidated debt, lines of credit, and auto loans—if the interest rate is higher than the return you’d see on investing that money elsewhere.  

Let’s say for example you can realize a 10% return by investing, and your auto loan is financed at 2%. It makes more sense to invest any additional money while maintaining regular payments on the vehicle. If, however, your interest rate exceeds your potential rate of return, focus on paying down the debt faster.  


Managing a mortgage 

It’s much more common for older Canadians to carry mortgage debt into retirement, especially as the housing market heats up, and people are purchasing more expensive homes later in life. Wherever possible, reduce the cost of borrowingthrough biweekly payments or refinancing for a lower interest rate.  

We strongly advise against counting on home equity to fund your retirement, so be sure your retirement income is sufficient to cover any continuing mortgage payments and source your income in the future.  

Don’t neglect your savings altogether 

Wherever possible, continue to save for your retirement. Paid off a loan or credit card early with accelerated payments? Keep making those payments into your retirement fund. Consolidated your high-interest debt into a low-interest loan? Invest what you’re saving on interest in your retirement fund.  

Investing and growing your money tax-free in a TFSA and reducing your tax burden now by contributing to your RRSP will make a significant difference in the years to come.  

There’s still time to build a retirement fund 

Carrying debt into retirement doesn’t have to mean financial hardship. Paying off high-interest debts and investing wisely will put you on the right path to a healthy retirement fund. CPP, OAS, and tax credits for seniors can also help boost your retirement income. In the years leading up to retirement, you have the opportunity to reprioritize and make the most of the money you do have.