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Hopefully you are meeting the Registered Retirement Savings Plan (RRSP) contribution deadline each year and are able to defer taxes on the money you contribute. While it’s great that you’re saving for retirement, it’s important to remember not to leave your money sitting parked in cash.
What is “cash drag”?
Investment portfolios holding a portion of assets in cash for a considerable amount of time can suffer from “cash drag”, so named because the minimal returns provided by cash actually drag down overall performance.
In the scenario that follows, we invested $10,000 in three different ways over a 10-year period: fully invested in a balanced portfolio; 50% in a balanced portfolio and 50% cash; and 100% parked in cash.
As the graphic below clearly shows, cash can be a real drag when it comes to your retirement portfolio. Not only will you be missing out on investment opportunities, your cash holdings may not even keep pace with inflation, leaving you with a negative real return.
Saving for retirement is good, investing for retirement
is even better
Would you like to avoid last-minute, lump-sum RRSP contributions?
With Pre-Authorized Contributions (PAC), you can invest automatically and save. It’s an easy and convenient way to start building up savings for retirement. You can choose how much money you’d like to save and how often.
Visit scotiabank.com/preauthorizedcontributions to try our interactive PAC video to see how your savings can grow.
How setting up a PAC benefits your investments:
- Eliminate the guesswork of when to invest
- Avoid the RRSP deadline scramble
- Compound growth potential
- Get started with as little as $25 per month
Source: Morningstar
1 The example is hypothetical and for illustrative purposes only. It is not possible to invest directly in an index. Assumes reinvestment of all income and no transaction costs or taxes. Value of investment calculated using a starting value of $10,000 and annual compounded returns from January 1, 2010 - December 31, 2020. Assumes investment in a balanced portfolio weighted 25% S&P/TSX Composite TR Index, 50% FTSE Canada Universe Bond Index, and 25% MSCI World GR Index. Cash is assumed to have been invested in FTSE Canada 91 Day T-Bill Index.
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer, their values change frequently and past performance may not be repeated.
