Continuing the series of posts (Part 1) examining the financial myths mentioned in David Trahair’s book Smoke and Mirrors, let’s take a look at the second myth:
RRSPs are the Holy Grail of Retirement
Mr. Trahair rightly points out that it is better to pay down credit card debt or income tax debt than invest in a RRSP and suggests that Canadians paydown all their debts including mortgage debt before investing in an RRSP. He concedes that RRSPs used wisely can be a significant part of a secure retirement but only if attention is also paid to spending patterns and debt levels.
I have a neutral opinion on the RRSP versus mortgage paydown debate. I believe that RRSPs are a slightly better option but think that either is fine. You can only tell which would be the better option with the benefit of hindsight. Mortgage paydown would have been the better option in 2000 but someone investing in equities inside their RRSPs in 2003 would be very happy with the results today. It would be ideal if you can contribute to the RRSP and paydown the mortgage but the key is to have the discipline to at least do one.
I have a feeling that Mr. Trahair is outraged that mutual funds are getting rich even when investors are doing poorly. But that is no reason to avoid RRSPs altogether. That would be a bit like cutting off the nose to spite the face. Investing in RRSPs doesn’t have to mean forking over a big chunk of your capital to mutual funds evrey year. You could construct a simple, diversified, low-cost portfolio in minutes using ETFs or index funds.
