Wednesday, March 2, 2016

Examining Six Reasons to Downgrade Retirement Saving

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.


  1. It is always interesting to see how folks interpret writings, and use them to rationalize bad behavior (myself included). Just going to go eat more Sugar Pops because Squawkfox said that cauliflower was too expensive :-)

    1. @Alan: I heard that stretching is sometimes bad so I plan to spend the rest of my life in an easy chair.

  2. The outrage on Twitter was a bit overdramatic and it tells me that those people didn't read beyond the first few lines of the article. Personal finance is all about priorities and (gasp!) sometimes retirement savings is number 3 or 4 on your list of things to save for.

    Your net worth argument is spot on. Progress is measured not just on the amount in your RRSP but if you've made strides paying down debt or building up a cash reserve - anything that moves the needle forward.

    Rob's article was clearly not written as an excuse to spend more, but to smartly prioritize savings and debt reduction goals depending on your age and stage.

    1. @Robb: My only real criticism of Robb's article relates to what he left out. If you've got credit card debt, you've probably done something stupid. There's no point in crying over past mistakes, but don't make the same mistakes in the future. It's sensible to stop making RRSP contributions long enough to pay off a credit card, but don't let it happen again.

      The one concern I have about focusing on net worth is that you can't control changes in the value of your assets. In particular, it doesn't make sense to spend more just because your house grows in value. The goal should be to contribute more to your savings in a year than your debt grows during the year.

  3. Michael, that's a good take on what Carrick wrote.

    I also fear that it will be easy for some to rationalize not saving because of one or more listed item.

    I agree with bench marking net worth (although always using original home value may be a better way to isolate all other savings/investments and all other debt). This way real estate doesn't distort what the actual progress of your savings vs debt is.

    For me it's all common (good) sense that I learned starting way back in my teens. Control money so it doesn't control you.

    1. @RBull: Thanks. I've always had a focus on my net worth, perhaps too much focus. But, most people could benefit from adding up their net worth and tracking it over time.

  4. Perhaps it's a Boomer permeation, but I find it odd how much Canadians focus on retirement. Maybe I'm weird for thinking it's weird. I like James' take: focus on building net worth which will provide you options so you can focus on living your life (instead of fretting about saving for retirement).

    1. @SST: I suspect the focus on retirement comes most strongly from those who hate their jobs but feel they have no better possibilities. I prefer to focus on financial independence and then do what I want.

  5. I would take a little bit of issue with a line pf credit.
    I "almost" wish I could sustain a permenant line of credit.
    My HELOC paid out >$17,5K dividends (taxable investment account) last year versus <$4K of interest charges on the HELOC. The "unfortunate part is that the divs are automaticly applied to the HELOC so I don't get to use them myself. However my net vale increased by $13.5K as the heloc was paid down.
    As the HELOC value decreases it opens up room for my to borrow and buy more stocks, which increases my dividends which increases the payback to the HELOC which increase my net worth.
    There comes a time though, retirement, when one does need access to the funds and so it will become necessary to wind down the taxable portfolio by paying down the HELOC and utilizing the "net worth" it has generated for me.


    1. @Ricardo: I don't think Carrick had your use of a LOC in mind. Most people who have perpetual LOC balances are just spending too much. Those running a HELOC and growing net worth are in a different category.

  6. I largely agree with your take, definitely this one: having more money gives you choices in life.

    The less debt, the higher the net worth you have, the more choices in life you might have. All good things.


    1. When I was paying off my student debt, I was also saving for retirement and building an emergency fund. All of these moves were increasing my net worth, but it was saving that protected me from future debt.

      Let me explain... My dad raised a very good point: it would be foolish for me to put everything towards towards by debt because once the money is gone, there's no getting it back in the event of an emergency and I'd have to rely on higher interest debt if I didn't have a cash cushion.

      The first company I worked for after graduation went under within two years. I was very glad I was facing that with an emergency fund!

    2. @Beth: You won't get any argument from me that it's important to have an emergency fund. Available cash doesn't seem that important until you have none.

  7. All good comments. My take is that lots of folks prefer immediate goods to future goods. Behaviour economic stuff with hyper discounting. One trick I read about was to get younger folks to look at their picture altered so they are aged to look old. When I was in my 20 I never dreamed I would live to be 60.