Rob Carrick upset many personal finance experts when he said there are six reasons to downgrade retirement savings as a financial priority. There is a thread of truth in each one, but I fear that readers who are overspending will latch onto one or more of them to justify continuing down their high-spending paths.
Before getting into Carrick’s list, I’d like to discuss the phrase “retirement saving.” It’s hard for young people to think about retirement. It’s too far off. I’ve found it more effective to explain the importance of building net worth. Having more money gives you choices in life. Ultimately, having a substantial net worth will give you a pleasant retirement, but even during your working life, having more money smooths out life’s tough breaks.
I’ve found that focusing on net worth resonates better with young people than talking about retirement saving. But there is another advantage as well. Too many people think they’re saving for their retirement when they simultaneously grow their lines of credit and contribute to an RRSP. If your new savings don’t exceed your debt growth, then you’re not really saving.
That said, let’s dig into Carrick’s six reasons to postpone retirement saving.
1. You’re saving for a first house in an expensive city
Saving to buy a house builds net worth. So, as long as you don’t build debts at the same time, I would say that this is a form of retirement saving in a sense. Having a larger down payment should ultimately lead to paying off the mortgage sooner and building larger RRSP and TFSA savings.
I’m not a fan of overpaying for a house in today’s market where house prices are often very large multiples of people’s income. But as long as you pay a reasonable price for a house, building a down payment is a good idea even if you don’t build explicit retirement savings at the same time.
2. You’re part of a maxed-out young family
If you’re part of a maxed out young family with house payments, car payments, and all the rest, then you’ve probably taken on too much debt. Maybe better choices would be a cheaper car, less eating out, a smaller home, or renting a place to live. But once you’ve dug the hole, it’s sensible to focus on increasing net worth. Paying off debt is as good as (or better than) setting aside retirement savings.
However, this approach can be a slippery slope to more bad choices. Paying off one car that’s too expensive just to buy another too expensive car is just living hand-to-mouth. With a proper focus on net worth, debts will melt away, and you can start building traditional retirement savings.
3. You have credit card debt
Having credit card debt is almost always a sign of poor choices. Maybe you’ve got a sad story of bad luck that drove you into debt. That’s usually a sign that you had no emergency savings and had no margin between your income and your lifestyle spending.
But once you’ve got credit card debt, you should see this as a hair-on-fire emergency. Not only should retirement savings stop, but all unnecessary spending should stop. Stop eating out, cancel cable, and stop all other spending that isn’t absolutely necessary until the credit card debt is paid off.
This is another slippery slope case. It’s no use to pay off credit cards and then go back to the same dumb habits. Focus on growing net worth.
4. You have student debt
Getting an education is the best investment I ever made. But even in the case of student debt, we may have lingering bad choices from the past. When experts call student debt “good debt,” some students take this to mean that they can spend freely and all the debt will be good. This is nonsense. Get a great education and borrow as little as possible.
Paying off your student debt grows your net worth as well or better than making an RRSP contribution, depending on your circumstances. Once the debt is gone, keep focusing on net worth and you will naturally start contributing to an RRSP, TFSA, or both.
5. Your line-of-credit debt has become permanent
This is often a sign that you’re indirectly using a line of credit to make RRSP contributions. Maybe it doesn’t look this way, but if you make an RRSP contribution from your pay cheque and have to dip into your line of credit before your next pay cheque, then you’re effectively contributing to the RRSP from the line of credit.
To increase your net worth, you’ll have to actually reduce your lifestyle spending. This will allow you to pay down the line of credit, contribute to retirement savings, or both.
6. You have no financial cushion
As Carrick says, build an emergency fund so you don’t have to go into debt for unexpected expenses. The other part of having an emergency fund is that if you’re forced to use it, you need to cut back on lifestyle spending to replenish it.
In the end, I agree with Carrick that there are many situations where it makes sense to stop making RRSP or TFSA contributions as retirement savings. However, those who miss his detailed messages might use his article as an excuse to overspend. It’s important not to turn a temporary suspension of retirement savings into a permanent choice. Better still, avoid getting into a financial bind in the first place. Build your net worth consistently, whether it is by paying down debt or adding to savings. Control your lifestyle spending so that your net worth keeps rising.