RRSP or Mortgage

This seems like an eternal question especially in North America where home ownership is sense of pride or American Dream/Canadian Dream.

Should I pay off my mortgage first before I contribute to RRSP?

It seems that there are different schools of thoughts on this.

Some might want to focus on paying off mortgage first before contributing to RRSP.

Some suggests to do both because it is both a long game and retirement savings take time to grow.

Both arguments actually make sense depending on your specific situation.

If your household income is not very secure, you might want to reduce the risk of foreclosure. You might want to focus on paying down the mortgage first. 

Some might have a generous defined benefit pension, no need to worry about retirement as much. They can afford to focus on paying off mortgage solely.

Some might want to change career from a secure and well-paid job to something they really want to pursue but riskier. They might want to prioritize mortgage.

The rationale to do both are several folds.

Frist, the return of investment is usually higher than mortgage interest rate. If you invest in a broad-base low-cost index ETF like S&P 500, the average annual return is 10% in the past several decades. The mortgage rate in the past decade was historically low at around 2% to 3%. We almost forgot about how high it was before. Therefore, interest rate and return of investment comparison is one key consideration.

Secondly, many people can’t really pay off mortgage and then have enough time to save for retirement because investment needs time to grow ideally a few decades. Here is an illustration. If you want to save $1M when you turn 65 years old, you only need to invest $300 per month in your 20s. If you wait another 10 years to hit the same goal, you will have to double the amount to more than $600 per month in your 30s. You have to double the amount again to more than $1200 per month in your 40s. As you can see, time is indeed money. We can’t really afford to wait.

However, either option is actually much better than no saving or no investing at all.