A basic piece of retirement planning advice should not be followed to the letter.
Yes, you should keep a slice of your retirement savings in cash. No, you shouldn’t let it sit in cash in your registered retirement, tax-free savings or non-registered accounts. Cash held in these accounts typically earns zero interest, which is a waste at a time when interest rates are still high enough to more than offset inflation.
In portfolio management, cash is a term to describe securities or deposits that are liquid and safe compared to stocks and even bonds. I recently asked investment advisers on LinkedIn what they use for retired clients keeping some cash in their accounts. The underlying strategy is to use this cash to fund withdrawals from registered retirement income funds or other accounts instead of selling stocks or funds that have fallen in price.
Here are the cash options that were mentioned:
- Laddered guaranteed investment certificates: One adviser said that for registered accounts, he uses a laddering strategy with varying maturity dates. Laddering means investing equal amounts in terms of one through three, four or five years. If required, maturing GICs could be used to fund your income needs.
- High interest savings accounts: HISA products for investors come in two formats, one of them packaged in an exchange-traded fund and another traded like a mutual fund. Yields in late April from 2.25 per cent to 2.5 per cent. You may have to pay brokerage commissions to buy HISA ETFs, while the mutual fund variant is commission-free. HISAs were mentioned most often by advisers for holding cash.
- Money market funds: They hold short-term government and corporate borrowings. Risk is low because maturity dates are less than 12 months in the future and holdings are limited to stable issuers. Yields were close to 3 per cent in late April.
Adviser views on how much cash to keep in hand ranged between enough to cover between six months and two to three years of expenses. Whatever approach you use for cash, remember to replenish your holdings after you draw down on them. One way to do that is to sell a portion of stock or bond holdings that have done especially well
As noted in a recent blog post, retirees also have the option to use in-kind withdrawals to meet their annual obligation to take money out of a RRIF. Essentially, you transfer a stock or fund from your RRIF to a non-registered account without selling. In-kind and cash withdrawals from RRIFs are similar in that they both must be reported as income on your taxes.