Chantal Pelletier is 50 years old and has two teenage daughters. She has a large mortgage and a few hefty expenses to pay for (like a trip to Europe on her credit card!). Behind this curtain of debt lies her future retirement.

“I like my job. And I haven’t given much thought to my retirement. Even so, I want to make sure I’m prepared. I don't want to continue working just because I didn’t make financial plans for retirement. I want the freedom to stop working whenever I choose,” she says.

When Chantal looks at her personal finances, she doesn't always know what to prioritize. "My mortgage is my biggest debt by far. It costs me thousands of dollars a year in interest," she says. On the other hand, she doesn't want to spend all of her savings on her mortgage payments. “Retirement is just around the corner. Should I maximize my RRSPs and TFSAs?” she wonders.

So, do you pay off debt or save for retirement? With inflation as high as it is, more Canadians than ever are asking themselves the same question. An Equifax Canada survey from early November 2022 confirmed this: 53% of Canadians are very anxious about their financial situation. 

How do you prioritize paying off debt or saving for retirement?

Deciding whether to pay off debt or save for retirement is not the real issue. It's about finding the right balance, because not all debts are equal. What’s important is managing both debt and savings so you have enough money to retire in comfort. The two are intertwined.

For example, Chantal Pelletier would like to fully pay off her house. "Imagine how much more money I’d have in my pocket if I didn't have mortgage payments," she says. In her case, it would free up nearly $2,000 per month. But the real question is whether paying off your mortgage is the biggest priority.

Which debt do you pay off first?

Having debt is completely normal. Debts cover many basic needs, such as:

  • Housing (mortgage loan)
  • Education (student loan)
  • Transportation (car loan)

But watch out that you don’t end up drowning in debt. If you’re having a hard time paying down your debts, consider debt consolidation.

It’s best if you pay off the debt with the highest interest rate first. This usually means your credit cards, which normally charge around 20% interest. Not paying them will cost you dearly in interest. Let's say you make only the minimum payment (3.5%) on a $5,000 credit card debt. You would end up paying $3,992.03 in interest over 187 months, or 15.6 years.

Focus on paying off your other debts based on their interest rate. Chantal Pelletier's mortgage, which she took out four years ago, is only 4%. By maximizing her RRSPs and TFSAs, she can probably earn more than 4% on her investments in the long run. Her investment earnings are also tax sheltered. And they would grow through the magic of compound interest, which is interest you earn on interest. In Chantal’s case, she’s better off saving for retirement, using registered investments. That’s a better strategy for her situation than paying off her mortgage faster. 

Need help with your budget? Talk to an advisor.

Find a Sun Life advisor.

How does a budget help?

Yes, the good old budget. We keep saying it, but a budget will give you a true picture of your finances. How? By calculating your expenses and comparing them to your income. That way you’ll see how much you can afford to set aside as savings. If you find yourself with an extra $2,000 a month, hooray! That will give you some room to manoeuvre in terms of your debts and savings.

With this money at your disposal, you can then decide which debts to pay off first. If you don’t have very much, paying off your mortgage faster could be the right move for you. What happens when you make more than the minimum payment on your mortgage? You reduce the number of years left and you pay less interest. That’s great, because ideally, you don’t want to be paying off your mortgage in your retirement years. But with the rising cost of housing, retiring with a mortgage is becoming more and more common.

If you have money left after that, you can invest it for your retirement. You can do this by saving your money in:

Where does your money go?

Use our budget calculator to find out.

Talk to an advisor

Not sure where to start? A Sun Life advisor can help you navigate your financial needs, and point you in the right direction. It’s time to act: Find an advisor.

This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation