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Canadian bills in a bird's nest. (mark wragg/Getty Images/iStockphoto)
Canadian bills in a bird's nest. (mark wragg/Getty Images/iStockphoto)

Retirement

Should I have cash in my RRSP? Add to ...

Many people think RRSP planning is just about putting money in, waiting for it to grow and cashing out at the end, but that’s just one element to building a successful retirement plan.

There’s a shopping list of things to consider when thinking about retirement savings, but perhaps a less known investor strategy is the idea of carrying cash in one’s investment portfolio.

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Having cash at your disposal in the context of investing means having a portion of your portfolio in investments you can quickly sell without triggering fees, tax hits or losses, which may not be the case with longer-term holdings. This money can be used if opportunities to buy good investments come up.

You can hold almost anything within a self-directed registered retirement savings plan portfolio, including cash, and, when a good buy opportunity comes around, you can convert cash-type holdings to a higher yielding investment without triggering tax consequences, as long as it stays within the RRSP-designated portfolio (though it may involve some fees).

Assessing the need for liquidity can help establish how much cash should be held in the portfolio and what kind of vehicles will work best, says Thane Stenner, wealth management and portfolio manager at Stenner Investment Partners within Richardson GMP Ltd.

“Typically we recommend, but it depends on where we are in the cycle, anywhere between 3 per cent ... up to 25 per cent in cash,” says Mr. Stenner, but he acknowledges there are a host of factors that must be looked at when assessing what will work for each person.

When he refers to cash, Mr. Stenner also means assets such as money market accounts – which act like a high-interest savings account but often require a high minimum balance to avoid fees – and other short-term instruments that are liquid, safe and currently earning about 1.5 per cent.

Reassessing a portfolio’s asset allocation is something to consider from time to time – especially during RSSP season – no matter what the economy is doing. But because of the current environment of low interest rates, now might be an ideal time to look at how the cash is invested and its earning potential.

“With rates really low today, people are having to deal with the dilemma of still being prudent, still having to balance portfolios, still having fixed income and some cash, but also having to deal with the acceptance of such low interest rates currently,” says Mr. Stenner.

And even beyond low yields, one of the major risks to holding too much cash in a portfolio is its exposure to inflation. “In fact, one of the big negatives with holding cash currently is, on an after-tax and after-inflation basis, you actually have net negative real rates of return out of cash holdings currently,” Mr. Stenner adds. “So not only aren’t you keeping up with inflation and taxes, you’re actually, on a year-by-year basis, currently losing money on cash.”

Clearly, there are many questions to consider in this low interest-rate climate when deciding how much cash to hang on to, such as: stage of career; need for liquidity; income level; and expectations of investment earnings.

Looking for clues from other investors may prove helpful. For example, the annual asset allocation survey by Tiger 21 – a 200-member organization of high-net earners with more than $20-billion (U.S.) in assets – reveals that its members allocate about 11 per cent of their portfolios to cash.

Another issue with high cash percentages in a portfolio is that it can also put pressure on the other assets to perform if cash is working against low interest rates, explains Matt Barasch, head of Canadian Equities and Wealth Management at RBC Dominion Securities. “The more cash you have right now, the harder and harder it makes achieving that [desired earnings] at the end of the year, so it’s hard to really recommend anything more than a minimum allocation of cash at this point,” he says.

But there are some good options if your liquidity needs are not immediate. Indeed, investments with a higher yield are generally going to be either longer-term investments, or riskier, or both.

“Notwithstanding the time commitment that can be involved, certainly your rates on GICs right now are significantly better than what you’re going to get on most savings accounts here in Canada, even the high-interest variety,” Mr . Barasch says.

And, because of volatility in the stock markets the portfolio flexibility cash creates might also allow people to make profitable investments in areas that have much higher yields than bonds or GICs, explains Jillian Bryan, vice-president and portfolio manager at TD Wealth. But patience is required in these situations.

“I have an adage … which is: Panicking serves nobody,” she says. “People who panic lose money every single time. And, actually, when there’s blood running in the streets, that’s when you have to look for opportunity.”

Cash in a portfolio allows investors to take advantage of buying opportunities and is the time to start bargain shopping, explains Ms. Bryan. When equity markets are down, it might be a good time to get in and buy stocks at a lower price.

“I always go to the point that people need to be patient and the market will give them opportunities,” Ms. Bryan says, “but if you don’t have cash, [and] you have all your chips in the game, basically you’re stuck.”

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