7 Nov

The Unlikely Retirement Savings Strategy.

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Posted by: K.C. Scherpenberg

The Unlikely Retirement Savings Strategy

Prepaying-your-mortgageOne of the best risk-adjusted investments you can make requires no commissions, no buying and selling and no management fees.

According to a new study from the Certified General Accountants Association of Canada (CGAAC), the boring old mortgage prepayment performs better than most common retirement savings vehicles, including RRSPs.

 

“…Single individuals and couples with no dependents may be better off accelerating their mortgage payments than contributing to a retirement account,” finds the study. “This is the case for all income levels and savings rates, but particularly for lower-income individuals.”

“Those earning $30,000 annually and saving 2% of their earnings will get a nearly twice higher return by accelerating their mortgage payments compared with saving through a RRSP.”

Investment-returnsOnce the mortgage is paid off, it’s assumed that one then takes the money formerly allocated to mortgage payments and starts investing it.

There is an exception to the above findings, however, and it applies to better-off homeowners with kids. The CGAAC says: “…In the environment of relatively low mortgage interest rates, savings through a RRSP may generate a higher return for the higher-income couple with dependents than saving through accelerated mortgage payments.”

In addition, relative performance depends on your investment alternatives. Some folks have access to investments yielding more (after tax and inflation) than  a mortgage prepayment. In that case, speeding up your mortgage burning party may not be your best option.

Exceptions aside, mortgage prepayments entail no principal risk and involve little effort. That makes them one of the best “lazy-man’s” saving strategies one can find.