The retirement savings race can be slow and frustrating. When I started saving for retirement I was putting away $50 a month. It seemed like nothing and it was annoying to look at the dismal balance month after month. Now, 4 years later I have over 5 figures saved for retirement which makes me a lot happier to look at.
However, just scratching the surface of 5 figures makes me want to invest more and have an even bigger balance. I’m really quite greedy when it comes to saving for my retirement. Recently I’ve seen quite a few great rates out there that are promoting loans for your retirement accounts. I’ve seen some great rates which makes me take a step back and think:
Is it worth it to borrow to invest?
Let’s say I can borrow $10,000 at 1.5%*
Over the course of the year I would be making monthly payments of $840.12, which means I will pay $81.44 in interest.
If I invest in a decently aggressive mutual fund or index fund with a low expense ratio (found with FeeX, of course!) I will most definitely be able to earn over $81.44 on my $10,000 investment. Most of the investments I’ve made have returned 10%+ year over year, meaning I could make over $1,000 in gains.
Now let’s say I decide to not take that 10k loan out and just invested $840 a month, making 10%. Each month my contributions would compound, and let’s assume for simplicity sake I earn 10% consistently over the year—by the end of the year I would have $10,643 sitting in my account, which is $357 less than if I took out the $10,000 at the beginning of the year.
So—is it worth it to take that loan out in order to invest in your retirement? That $357 may not seem like a lot now, but over the 40 years it will take until I retire that $357 will turn into over $16,000**.
The downside is of course if you don’t make the 1.5% return and then you could end up losing money, however with 1.5% being such a low rate I’m considering that it might be a good investment. It’s an unexpected approach to retirement investing — after all, borrowing to save isn’t the usual way of going about things—but in this situation, provided the investing fees were low and the returns held up, you’d come out on top.
* I have located this rate in Canada for an RRSP loan
** A retirement calculator was used to project this at a 10% growth