The battle between debt, retirement

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Quelle surprise. Canadians are showing less interest in their investments this year, preferring instead to pay down debt. It’s an interesting twist for those trying to keep clients on track with their retirement savings plans.

A survey conducted in mid-December for Manulife Financial found the number of people who say their top priority is to pay down credit cards, lines of credit and mortgages has hit a five-year high.

In a nutshell:

• 28% said their top priority is to trim consumer credit debt, up from 20% in early 2008
• 14% said mortgage reduction was their biggest priority
• only 11% said saving for their retirement was a priority, down from 14% of those surveyed in December 2008

To state the obvious, market performance is the driving force behind this mentality. For many advisors, particularly for those serving more affluent clients, debt reduction is not a large or overriding concern and most clients will still make their monthly or annual contributions, oftentimes making maximum contributions to obtain the related tax benefits.

But in the past year or so, some clients have been discouraged by volatility. Rather than putting money into an RRSP, simply to see that money disappear, some wonder at times if they should perhaps be enjoying their money today, rather than risking it in the markets.

Fortunately for everyone, this is an extreme point of view and most clients do understand basic investment principles.

“Putting money into an RRSP and seeing it go negative, or earning a 0.5% rate of return, is just kind of discouraging,” agrees Cynthia Kett, principal at Stewart & Kett Financial Advisors. “That being said, it is one of the few tax shelters that are available to most taxpayers. People do have cash on the side and they’re making RRSP and Tax Free Savings Account contributions. Most don’t have to worry about debt reduction.”

Similarly, over at TE Wealth Financial Consultants, regional vice-president Warren Baldwin says people are likely paying down debt not because of any fundamental change in their financial proclivities, but because of market performance. “Surveys are always backward looking, right? No surprise. It was a pretty awful time 12 months ago. Putting money into the markets, that’s a hard sell.”

For those who are wobbling and threatening to abandon regular contributions in favour of debt reduction, certain advice, no matter how often it’s touted, is still valid and worth repeating.

First, commission or no, consumer debt needs to go. In that sense, those surveyed appear to be on the right track.

“Credit card debt, that’s the first thing that should go,” says Robert Abboud, Raymond James advisor and author of No Regrets. “It’s just lethal.”

Even loans at lower rates of interest, given that rates have been so low for so long, are beginning to make some consumers a little nervous. “People are just feeling a little more nervous about carrying debt in general,” says Kett. “There is the possibility that interest rates will start rising again. People want to make sure they aren’t holding a lot of debt at that point in time.”

For the rest, paying down non-deductible debt (mortgages and such) while also making retirement plan contributions still makes a lot of sense, no matter what state the markets are in. “You’re not going to forget to make mortgage payments,” says Baldwin. “Why not split the difference? Put some into an RRSP and use the refund against your mortgage.

“My issue with shunning the RRSP to pay down debt is that the RRSP is never going to come tap you on the shoulder and say hey, you forgot about me. Part of financial discipline is [contributing to] your RRSP, pretty much on an annual basis.”

To know what you might be up against when delivering advice like this, we turn back to Manulife’s Investment Sentiment Index.

Although this particular sentiment survey has remained in positive territory since it was launched in 1999, it suffered a sharp drop in December 2008 and again in December 2009 to hit an all-time low of +5. By comparison, the index peaked at +35 in early 2000 and fell to +11 in December 2001.

In its report, Manulife says index numbers have generally hovered near six-year highs, above 20+ in recent years.

Not surprisingly, equities and mutual funds are the two big sore points for those surveyed. Equities, in fact, was the only category for which sentiment was sitting in negative territory this year after gaining some ground in the September survey, equities lost six points to rest at -5.

Only 33% said it was a good time to invest in stocks or mutual funds; 38% said it was a bad or very bad time to invest. When speaking about mutual funds alone, the sentiment numbers reverse – 40% said it was a good time to invest; 27% said it was a bad time to invest, while another 23% were not sure.

Overall, the measurement of how Canadians feel about different investment categories and vehicles suggests 65% still believe their homes are a good place to invest and balanced funds, for better or worse, climbed out of negative territory to take third place in the list of most popular investment options. In second place, real estate investments dropped 13 points but still maintained its lead over fixed investments and cash.

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• Kate McCaffery is a Toronto-based freelance financial journalist.

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