Get the best of both worlds

Canadians have taken advantage of low interest rates to buy record numbers of homes and condos. Younger Canadians especially have embraced the idea of building equity in a home. Many have come to see their condo not only as a place to live, but also as a financial asset - particularly as the recent troubles in the stock market have made them a little hesitant about investing.

At 30, retirement probably seems a long way off to Jessica. It makes sense that she would want to pay off her mortgage as quickly as possible. After all, her condo represents her most significant investment, and the mortgage on it her largest debt.

Jessica realizes this and has done a good job in reducing her mortgage principal. Over the life of the mortgage, this can significantly reduce interest costs.

But this does not mean that she should forget about her retirement savings - on the contrary. Saving for her future through a registered Retirement Savings Plan (RSP) offers many benefits. To find out more, click through the links below.

Why contribute to an RSP?

Unlike her parents, Jessica will probably have five or six different jobs over the course of her career. Along with this freedom comes the responsibility of providing for her financial well being.

At her present job with a small marketing company, Jessica does not have a company pension. This makes it all the more important for her to build her retirement savings.

Long-term growth. Although her retirement may seem a long way off, now is actually the best time for Jessica to build her retirement savings. The sooner she invests, the more time her money can grow and help provide for a comfortable retirement. What's more, the money earned in her plan compounds tax-free.

Tax savings. Contributing to an RSP gives you one of the best tax breaks available. Jessica is in the 30% tax bracket. A one-time contribution of $5,000 would give her a tax refund of $1,500. In other words, her $5,000 can grow tax-free at a cost to her of only $3,500.

Liquidity. If Jessica were ever to face difficult financial straits, such as a layoff or termination (which would lead to lower taxable income), she could always withdraw some of the money in her plan to tide her over. Her investment in her condo is not so liquid.

Likewise, if she ever wanted to return to school and needed some money to help fund her education, she could draw on her retirement savings through the Lifelong Learning Plan (LLP), which would allow her to borrow from her RSP savings interest-free.

Build a diversified asset base. If the recent troubles in the stock market have taught us all one important lesson, it is that of having a diversified base of assets that work together to achieve your goals. Tying up all her money in her condo would leave Jessica exposed to the whims of the condo market.

How to get the best of both worlds

Jessica has good financial sense. She has diligently saved to furnish her condo, and has worked hard to reduce the interest costs on her mortgage debt. But she needs to start saving harder for retirement.

Fortunately, there are ways that Jessica can continue to cut away at her mortgage and build her RSP. Here are a few strategies that she might want to consider.

Put her tax refund to use. One way for Jessica to do both is to make her RSP contribution each year and use the resulting tax refund to pay down her mortgage. In her 30% tax bracket, a $4,000 RSP contribution would generate a refund of $1,200, which she could then apply towards the principal on her mortgage.

Boost her RSP with a loan. In today's low-interest-rate environment, Jessica should also consider taking out a loan or line of credit and using the money to catch up on her RSP contributions.

If the interest rate on her mortgage is higher than the rate she could get on a personal loan, she could also use part of the loan to pay down her mortgage (most lenders allow you to make an annual, lump-sum payment on your mortgage principal).

Consider regular RSP contributions. Another alternative for Jessica to explore is a regular investment plan, in which money is automatically deducted from a bank account and put in the RSP investment of her choice. Regular investing is an easy way for Jessica to ensure that her retirement savings maintain their priority.

Let's say that her mortgage is paid on the 15th of every month. She could then have small, monthly contributions made to her RSP at the end of each month. This way, any extra cash she has at the end of each month could be saved and used to reduce her mortgage principal each year.

Need advice on how to balance your financial goals? Your Scotiabank advisor can help. Click here to find the branch nearest you, or call one of our Personal Investment Advisors at 1-800-953-7441.

If you're ready to start building your RSP, consider setting up a regular payment plan. With Scotiabank's Hands Off Service, you can arrange to have deductions from your chequing or savings account deposited directly into your RSP, on a monthly, bi-weekly, or other schedule of your choice.

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