Pay off debt or save for retirement?

Many Canadians are grappling with debt — and increasing amounts of it. As a result, they’re struggling to keep up with both expenses and retirement savings. For some, saving for retirement has become an afterthought altogether.  

That can put advisors — many of whom are focused on investment choices — in a quandary.

“We still have a culture in which advisors are doing an investment plan, not a financial plan,” said Bruce Sellery, CEO of non-profit credit counselling agency Credit Canada. “If you’re doing a financial plan, cash flow is required. It’s requisite, and it’s not always done.” 

Credit Counselling Canada’s 2025 Consumer Debt report revealed that 36% of Canadians have seen their debt increase from a year ago, and nearly 30% claimed their financial situation had worsened over that period. The agency’s survey of 1,200 Canadians, conducted this January, also found that 64% claimed to have recently relied on credit or dipped into their savings or investments to manage expenses. 

Experts say that with debt becoming a growing problem in the country, financial advisors must be candid with clients who are carrying debt and, at times, even counsel them to pay down their debt before they save for retirement. That means looking beyond investment advice.

Allow for flexibility

James Brown, senior investment advisor, Langlois Brown Wealth Management, iA Private Wealth in Vancouver, said he’s served many clients with debt. He attributed this to “extremely high” property prices in B.C., which make it common for people to have million-dollar-plus mortgages.

To help these clients manage their debt and retirement savings, Brown usually starts by looking at whether a client has high-interest or non-deductible debt.  If so, that’s probably the most important thing to get out of the way, he said.  

Next, he’ll advise his client to begin saving for retirement, typically in an RRSP, to get a tax refund. Then, “in a perfect world,” Brown said he advises the client to put that tax return into the principal of their mortgage.  

“It’s a very common process,” he said. “Usually it’s pay down debt, get money into an RRSP, take that tax refund and, of course, apply that to principal or apply it to more high-interest debt you may have.”   

If a client has significant high-interest debt, he advises them to put their retirement investments on pause until that debt is under control.   

Brown, who’s been in the financial services industry for some 28 years, emphasized the importance of allowing for flexibility in a plan, as life can throw curveballs at people.   

He noted that one of the mistakes he made as an advisor early on in his career was coming up with “way too strict” of a plan for clients that encompassed retirement savings and paying down debt with no wiggle room.   

“It really starts with a balance and finding out how can we come up with something that works for everyone — a combination of paying down debt, adding investments, and then, of course, being able to live your life at the end of the day,” he added. 

Options for clients

Jason Heath, a certified financial planner and managing director with Objective Financial Partners in Toronto, offers three options to clients in debt. They can increase their income, “which is easier said than done,” decrease their expenses or sell assets. 

In some cases, the client could pause contributions to a TFSA, for example. In other cases, they could pull from the TFSA to pay down debt, Heath suggested.  

With an RRSP, he said, things get more complicated.   

“If somebody is in a relatively high tax bracket, there might be an advantage to continuing to contribute to their RRSP as opposed to paying down debt, unless the debt is really high-interest rate credit card debt,” Heath said. “But certainly, it’s a lot harder to tap into an RRSP to pay down debt or help with debt payments because there are tax implications.”  

He also looks to see how much a client who’s already saving for retirement is making from their investments, noting the client would need to be earning a higher rate of return on their, say, TFSA than the interest rate they’re paying on their debt “to come out ahead.”    

Advisors must also take note if clients are “over-saving” for retirement, Heath stressed, meaning they’re either on track to retire long before they want to, or have committed more to retirement savings than they can handle. In the latter case, they may fall behind their savings goal, or lack cash to deal with unexpected emergencies, forcing them to borrow money.   

In these situations, it can be helpful to use financial planning software and develop a long-term retirement projection that shows these clients they can reduce their contributions so they’re not running cash-flow negative but are still on track to meet their retirement goals, Heath said.   

“Sometimes it’s just showing them the math of how much they need to save.”  

Objectivity is key

Heath said offering services on a fee-only, advice-only basis has meant he can be completely honest with clients. Even if he’s giving advice they didn’t want to hear.

He once had a client who was paying for private school for his children, while carrying a big mortgage for a relatively expensive home, as well as lines of credit and credit card debt. The client also had money set aside in an RRSP.  

“From the outside looking in, I thought, ‘Boy, I mean, maybe you can’t have your kids in private school,’”Heath said. “But that was a no-go for them.”   

He offered a few other options: the client could either continue to rack up credit card debt or cash in their RRSP investments to help with their cash flow, which “are both bad situations,” he said. The final solution he suggested was that the client could downsize their home to pay down some debt and reduce their costs.   

This led to “a bit of conflict” with the client, Heath said, and “we grew apart because the advice I was giving was not advice that they liked. I think they were looking for sort of a magic-bullet solution that was going to solve their cash flow issue, but I didn’t see one.” 

Heath acknowledged that fee-based or commission-based advisors may not feel as free to be as straightforward with clients. 

“It can be complicated, but I think that advisors need to look at the whole situation,” Heath said.

However, Heath noted that it sometimes makes sense to advise clients to put their money into retirement savings if they’re in a vicious cycle of paying down and then racking up debt again.  

“The one good thing about investing, particularly if it’s investing in an RRSP, is that money is sort of out of sight, out of mind,” he said.

Sellery similarly suggested that fee-based and commission-based advisors should keep their biases in check and analyze what makes most sense for a client.  

If the client has high-interest debt, then it’s a guaranteed return to reduce that debt first. But if they’re paying a 2% interest rate on their mortgage, for example, then investing in equity markets makes sense because they’re likely to make more than 2% on their investments, he said.  

“Get really clear on the math,” Sellery said.   

Sellery also recommends using a concept he created called the Priority Pyramid, based on Maslow’s hierarchy of needs. The base of that pyramid is cash flow, followed by debt repayment, savings, tax saving vehicles and investments.  

The best advisors, Sellery said, will start at the beginning of the pyramid. If they notice that a client is cash-flow negative, then they’ll say, “Stop the presses. You’ve got to pay that off first before you cut any cheque to me or set up any automatic contribution [to a TFSA or RRSP],” he said.

Helping clients control debt helps advisors too  

Speaking to clients about debt can be hard, but it can pay off.  

Practice helps. Sellery recommended role-playing with a friend, colleague or spouse, asking them to act as if they’re a hypothetical client. The advisor can give the hypothetical client a persona. They can then preface the conversation by saying, “Listen, I have a difficult conversation that I need to have with you,” Sellery said. Alternatively, they could say, “I need to ask you a difficult question. How do you plan on paying off this credit card debt in the absence of a behaviour change or whatever?”   

Advisors who have these tough conversations with their clients are more likely to retain them, Sellery said.  

“I think it drives loyalty, I think it builds trust, and I think it supports referability,” he said. “In this case, there is a premium on being nice, and that’s not helpful to clients. Of course, you’re going to be polite and gracious and all that stuff, but I think the great advisors push the envelope, and they’ll say, ‘Well, what else? Let’s say you delivered that. Then what else?’”  

Brown has seen the benefits of providing this advice.  

“In trying to grow our own book of business, we’ve noticed that helping clients to control that debt has actually ultimately worked in our favour,” he said, noting this frees up clients’ cash for investments. “Once we can show them at least a bit of a plan, we’ve usually found that it’s helped us grow our asset base.”