Here are two numbers to consider. The first is 0.5%, the typical interest rate Canadian chartered banks currently offer on non-chequable saving accounts.1 The second is $1 trillion – that’s how much Canadians amassed in bank deposits of all types in 2015, according to research and consulting firm Investor Economics.
Now ask yourself this question: If Canadians are paid so little to keep their money in the bank, why aren’t they investing in something that earns a better return? You might think the answer is age-related – older Canadians tend to be more conservative and may simply want peace of mind, knowing their cash is close at hand.
If you think that older people are the only ones sitting on their cash, think again. According to Sun Life Global Investments 2016 Market Sentiment Report, Canada’s 9.5 million millennials (age 18 to 30) hold on average 31% of their portfolios in cash, second only to 37% for Canadians over age 67.
According to the same report, nearly 33% of millennials also sold investments to raise cash in 2016, and of those who did, 50% said they did so out of fear of losing money. And that response probably underscores why Canadians prefer to keep so much money in their bank accounts.
But as the first chart below shows, while hoarding cash may make some people feel secure, when inflation’s factored in, they may actually lose the spending power of their money. And as the second chart illustrates, for the period shown, they might have been better off staying invested for the long term in a well-diversified balanced fund.
So how can clients save for retirement, or create retirement income, by shifting some of their cash into an investment that potentially pays a better return? We asked Cindy Crean, Managing Director, Private Client, Sun Life Global Investments, for her views on Canadians’ love affair with cash and why they may want to consider alternative investments.
Cindy, why do you think Canadians are holding so much cash?
There could be many reasons for this depending on the individual and their circumstances. People naturally procrastinate, so their cash often sits on the sidelines until they get around to doing something with it. And that could take months, or even years, resulting in a significant opportunity cost. Another reason could be that people perceive risk in other investments, so they hold cash to retain their capital. But there’s a real cost in doing that. (See charts, above.)
Are you surprised that millennials hold almost as much cash as their grandparents?
Yes, this does surprise me. Millennials seem to be risk-averse, and the opportunity cost of not investing is significant. This is because millennials have a long time horizon until retirement, so they can invest their savings in line with their risk tolerance to ensure they’re able to reach their retirement or other long-term savings goals. And with today’s low-interest-rate environment, and after taxes and inflation are factored in, they may actually have a negative return on their cash.
How does holding cash affect a client’s retirement plan?
It depends on life stage. The younger you are, the more impact it could have because you give up the opportunity to compound returns. And with today’s low interest rates, clients need to put their money into investments that will provide them with a return that will help them reach their short- and long-term goals, including how and when they want to retire. People may find they have to work longer or take a lower income in retirement if their nest egg isn’t invested at a decent rate of return. A retirement plan can really help to show this problem to clients and may help get them on track to meet their retirement goals.
What advice would you give an advisor who has a client with a sizeable amount of cash sitting in the bank or an investment account?
I’ve worked with many clients who’ve been in this position. My best advice is to start with a plan. Once they see how sitting on their cash affects their financial goals, they’re better able to get their cash invested in a properly diversified portfolio that meets their tolerance for risk.
How about millennials – what would you tell them?
It depends on their individual circumstances. If they’re saving for a short-term goal like a down payment on a house, they may want to invest very conservatively so the money is there when they need it. If they’re investing for a longer-term goal like their child’s education or retirement, they should work with an advisor to develop a plan to help reach their goals and invest their cash.
What are some of the alternative investments to cash you suggest to advisors working with clients approaching retirement?
Again, it depends on a client’s circumstances. Overall, I suggest that if they have to draw on their cash soon, they should consider a diversified, managed solution that will help create some cash flow. A managed solution with some equity exposure can also help grow their cash in retirement to create a hedge against inflation.
According to the 2015 Sun Life Canadian Unretirement Index, the majority of Canadians want some of their retirement income guaranteed. Would moving cash into segregated fund products, like Sun Life GIFs (guaranteed investment funds), be a good strategy?
Yes, it could be a great strategy for some clients. Many Canadians don’t have the benefit of a pension plan at retirement, and segregated fund products can help create guaranteed income during their retirement years (as this overview of Sun Lifetime Advantage GIF demonstrates). This strategy is also good for clients who want guaranteed income to cover basic expenses. It can help give them peace of mind.
How do segregated fund products help investors reach their long-term savings goals?
They can provide the guarantees that many investors want. For risk-averse clients, some segregated fund products provide guarantees on the investment and for the estate, which can help them sleep at night. In addition, they have the opportunity to earn greater returns than with cash.
Are segregated fund products suitable for affluent clients with large cash balances?
Segregated fund products could be a great fit for any client looking for guarantees and estate settlement benefits. If clients are very risk-averse, segregated fund products could give them peace of mind along with some opportunity for growth. They may be suitable, for example, for a portion of their investments to provide them with a guaranteed income for basic expenses and some estate-planning benefits.
It’s important for clients to work with an advisor to build a comprehensive retirement plan so they can see how investment solutions, like segregated fund products, can help them reach their retirement and estate-planning goals.
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Cindy Crean is Managing Director, Private Client, at Sun Life Global Investments. In this role, Cindy is responsible for building and leading our private client service and product offering. Cindy has extensive industry experience from tax and estate planning to developing, leading and growing wealth management strategies, most recently as Executive Director, Wealth Advisory Services, CIBC Private Wealth Management. Cindy was a key member of CIBC’s Private Wealth Management Executive Team, where she attracted significant new assets to Wood Gundy and CIBC Private Investment Counsel, as well as increased Wealth Advisory Services across the CIBC group of companies. Prior to CIBC, Cindy was AVP, National Accounts at Invesco Trimark, where she was responsible for the bank branch channel in a national accounts role. Cindy holds a BA in Economics from Wilfrid Laurier University. She also holds a Certified Financial Planner (CFP) designation.