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BMO Bank of Montreal

February 08, 2012 08:00 ET

BMO Retirement Tips of the Day: Debt & Retirement-Good vs. Bad Debt and Paying Down the Mortgage

TORONTO, ONTARIO--(Marketwire - Feb. 8, 2012) - As the February 29th deadline approaches to make a contribution to a Registered Retirement Savings Plan (RRSP) and as part of its ongoing commitment to improving financial literacy, BMO Financial Group will be providing daily retirement tips during the month of February from BMO Retirement Institute Head Tina Di Vito's new book 52 Ways To Wreck Your Retirement…And How To Rescue It.

Tip Number Fifteen:

Know the difference between good and bad uses of debt

Preparing for retirement is not only a matter of building savings; paying off loans so that you can retire debt-free is equally important.

Keep the following in mind when you consider whether your debt is good or bad:

  1. Will your initial investment increase in value? Borrowing for something that is going to increase in value over time (like investments or a home) is a good debt; borrowing for something that doesn't go up in value or declines in value (like electronics or a car) is a bad debt.
  1. Is the interest on the loan tax-deductable? A loan where the interest paid is tax-deductable is better than one where the interest is not tax-deductable. If you are eligible to claim the interest on a loan as a deduction on your annual tax return, this may lower your overall taxable income and reduce your marginal tax rate.

Tip Number Sixteen:

Pay off your mortgage sooner and enter retirement mortgage-free

Work towards becoming mortgage-free faster. This is one of the best strategies to help secure your retirement income. Not only will you be mortgage free when entering into retirement, but it also allows you to increase your savings during working years. Understanding how a mortgage works and the importance of maintaining a low interest rate are key to paying off your mortgage sooner. When choosing a mortgage take into consideration fixed or variable rate, the flexibility of the mortgage and the term.

Some tips to becoming mortgage free faster include: making accelerated or extra payments throughout the year, converting to a bi-weekly payment structure rather than monthly, maintaining constant payments even if your interest rate falls during the term of the mortgage and using caution when opening a home equity line of credit.

For more information on retirement: www.bmo.com/retirement

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