Example of Catherine, who is Taking Control of her Debts to Better Finance her Retirement

Catherine is age 42 and has calculated how much she would need to save for retirement using SimulR. She realizes that she is not saving enough to be able to stop working at age 60, as she would like to. In addition, she does not have a workplace pension plan. Catherine considers the various possibilities and realizes that she could save more right now by managing her debts differently. This is what she can do until her house is paid off and her children are older. Let's take a closer look.

Combine her debts

Catherine has a credit card balance of $10 000, with an interest rate of 19%, and she pays the minimum each month. She also has a car loan of $20 000 at a rate of 9%. These two loans cost her $3700 in interest per year. Catherine could save a lot if she grouped her two debts into one loan with a lower interest rate. She therefore takes out a home equity line of credit at a rate of 7%, as her house is partially paid off.

Invest her savings

In the first year, Catherine will save $1600 by grouping her debts. She will then put this money into a registered retirement savings plan (RRSP) and choose to invest it in a balanced asset allocation exchange-traded fund (ETF). If you want to know what it is, we talk about it on the How to make money thanks to your savings? web page. Catherine has done her research, and this is the investment that suits her best, according to her investor profile. She is investing her money for the long term, as it is for her retirement.

By investing her money into an RRSP, Catherine will reduce the income on which she pays income tax. Her income is taxed at around 36% by the Québec and Canadian governments. She will therefore receive a tax refund of $576, based on the $1600 she has invested into an RRSP, multiplied by the 36% income tax rate.

Take advantage of her tax refund

Should she invest her tax refund for her retirement or speed up the payment of her debt? These are two interesting choices, but since Catherine wants to accrue more savings, she chooses to invest her money. In total, she will be able to save $2176 because she will have organized her debts differently and taken out an RRSP. She will not need to cut back on her spending to achieve this.

The two loans she combined had a duration of 5 years. By repeating this process for these 5 years, she will have saved a little over $4800 in interest! If she then invests that money into an RRSP until she turns 60, she will have around $12 400 more for her retirement. Her choices were definitely worth it! When she can afford it, she can increase her savings to have the retirement she wants.

If you want to know which strategies may apply to your situation, do not hesitate to ask for advice.