How to save for retirement while paying off debt

Saving for retirement is essential for long-term financial stability, but paying off debt can often take priority. However, it's important to strike a balance between paying off debt and saving for retirement. In this article, we'll explore some strategies for saving for retirement while paying off debt, specifically for a Canadian audience.

Start with a budget

Creating a budget is the first step in any financial plan. List all of your income and expenses, including debt payments and retirement savings contributions. This will help you identify areas where you can cut back and free up money for retirement savings. Use online tools or apps like Mint, YNAB, or Personal Capital to help you manage your budget.

Prioritize high-interest debt

If you have high-interest debt like credit card debt, prioritize paying it off first. The interest rates on credit cards can be as high as 20%, which can eat into your retirement savings. Consider consolidating your debt with a low-interest personal loan or balance transfer credit card to save on interest and pay off debt faster.

Take advantage of employer-sponsored retirement plans

If your employer offers a retirement plan like a 401(k) or a Registered Pension Plan (RPP), contribute at least enough to get the full employer match. This is free money that can add up over time. These contributions are tax-deductible, which can also lower your taxable income.

Consider a Registered Retirement Savings Plan (RRSP)

An RRSP is a tax-advantaged account designed for retirement savings. Contributions to an RRSP are tax-deductible, and the investments inside the account grow tax-free until you withdraw the money in retirement. Consider contributing to an RRSP if you have extra money after paying off high-interest debt and contributing to an employer-sponsored retirement plan. The contribution limit for 2021 is 18% of your previous year's earned income or $27,830, whichever is lower.

Don't neglect other financial goals

While saving for retirement is important, it's also essential to have an emergency fund and pay off any outstanding debts. Aim to have three to six months' worth of living expenses in an emergency fund to cover unexpected expenses like job loss or medical bills. Once you have a solid emergency fund, you can focus on saving for retirement.

Seek professional financial advice

If you're unsure about how to balance paying off debt and saving for retirement, consider seeking professional financial advice. A financial planner can help you create a personalized plan that takes into account your financial goals, risk tolerance, and time horizon.

Saving for retirement while paying off debt requires careful planning and prioritization. Start with a budget, prioritize high-interest debt, take advantage of employer-sponsored retirement plans, consider an RRSP, don't neglect other financial goals, and seek professional financial advice if needed. By taking these steps, you can achieve long-term financial stability and retirement readiness.

Sources:

Government of Canada. "Registered Retirement Savings Plan (RRSP)." Retrieved from https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html

Investopedia. "The Best Retirement Plans for Small Business Owners." Retrieved from https://www.investopedia.com/best-retirement-plans-for-small-business-owners-4770813

Financial Consumer Agency of Canada. "Creating a Budget." Retrieved from https://www.canada.ca/en/financial-consumer-agency/services/budgeting-saving/creating-budget.html