Not another rrsp vs. mortgage post!

by Mike Holman

I had mentioned previously that our general financial plan to prepare for retirement was to pay off all debts, max out my rrsp room, and hopefully invest outside the rrsp as well. I don’t want to ignite the immortal rrsp vs. mortgage debate since it appears that either option or any combination is a financially prudent course of action, but I would like to share my approach for my situation.

In our case, we do both rrsp contributions and extra mortgage payments. I don’t maximize the rrsp for now because I’d rather focus more on the mortgage since it worries me a lot more than the any lack of rrsp does at this point in time. On the other hand, being in a high tax bracket I like to make rrsp contributions because the money left over after taxes is not all that much. On the other hand again, the mortgage doesn’t go down very quickly if you don’t make extra payments.

I’ve read a number of rrsp vs. mortgage debates where the rrsp side argues that future investment returns will be higher than the current mortgage rates and vice-versa but the reality is that if you are planning to pay off your mortgage in 10-15 years as I am (or even quicker) then it’s debatable how much confidence someone can have in assuming a certain rate of return on their investments since 10-15 years is not really a long time when you’re talking about equities. Another factor is the mortgage rate assumption, a lot of investors just take the current rates and assume they won’t change when they do their calculations but are the rates really going to stay in a narrow range over the next five, ten, fifteen years? Assumptions are great for getting an “idea” of what might happen but they are really just guesses.

To conclude, I don’t know if it really matters that much exactly how we go about (eventually) maxing my rrsp and paying off the mortgage as long as we do it in a way that feels most comfortable.

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