Save for retirement or pay down debt?

Mercer analysis illustrates the potential impact of high interest rates on debt and savings.

Findings from the fifth annual Mercer Retirement Readiness Barometer

Challenging environment for younger generations to prioritize financial demands

A 30-year-old has 5% of their income with debt of $30,000 to either:

Pay down debt over their career while also saving for retirement

1 year
delay in retirement

3x
as long to pay down debt
Pay down debt over the short term, then shift to saving for retirement later

$125,000
more in savings at age 65

There is a financial advantage to paying down debt first when interest on debt is higher than the expected return on investments.

However, higher interest rates may be beneficial if you’re retiring.

A 65-year-old has $500,000 in savings to either purchase a single-life annuity or invest conservatively in a retirement income product:

$3,500 more
in annual retirement income with an annuity

^{But if interest rates fall 1.5%,}

$1,700 less
in annual retirement income with an annuity

In an elevated interest rate environment, retirees may have windows of opportunity, although financial literacy will be required to navigate various retirement income options.

How can organizations support their workforce during uncertain times?

75% of employees are experiencing increased financial stress.*

Employer matching programs can help employees save more.

Introducing savings components such as TFSAs offers employees more financial flexibility.

Evaluate the financial well-being needs of your employee demographics.
Enhance your workplace retirement and savings program with flexible components.
Empower your employees by strengthening their financial literacy.

If a 30-year-old with access to a 100% matching employer program pays down debt first, then shifts to savings later, they could end up with $250,000 more in savings at age 65 versus trying to pay down debt over their career while also saving for retirement.

Make a plan to help ensure all your employees are retirement-ready.

The Mercer Retirement Readiness Barometer measures the age at which different personas can comfortably retire based on their participation within an employersponsored DC plan and benefits provided by the government (like CPP/QPP/OAS). The above analysis is based on Mercer retirement readiness analytics using data from proprietary Mercer databases and tools.

The sample persona to illustrate debt payment versus retirement savings assumes that the 30-year-old is earning $70,000 with $30,000 in personal (non-mortgage) debt and 5% of income available annually for debt payments and/or savings. Retirement readiness is defined at a 75% probability of not running out of money before death if an appropriate level of income is maintained throughout retirement (including government benefits), which for the 30-year-old is 66% of pre-retirement income. In determining the impact on retirement savings at age 65, it is assumed that for each year until age 65 the interest rate on the debt would be 10% per year, and the expected rate of return on retirement savings would be 6%. The analysis assumes that debt can be paid off over 10 years by focusing on paying down debt first and then shifting to saving for retirement. For the workplace savings plan scenario, it is assumed that 100% of contributions are matched by the employer for a total of 10% of contributions annually.

For the 65-year-old retiring today, it is assumed that the sample persona has $500,000 in savings to either convert to an annuity or to direct to a retirement income product. Annuity pricing is based on January 2024 levels. The investment in a retirement income product is assumed to be 40% equities and 60% fixed income at retirement and then graded down to 20% equities and 80% fixed income by age 80.

* Mercer Canada Inside Employees’ Mind Survey, 2023.