The key to successful retirement - Managing short-term cash effectively

As Canadians approach and enter retirement, part of their financial focus naturally shifts from aggressively growing their retirement savings to preserving their retirement savings and managing the cash flow that it generates. As most people discover, managing short-term investments involves trying to achieve a number of competing goals.

FOUR THINGS TO LOOK FOR IN A SHORT-TERM INVESTMENT
In general, there are four goals that a short-term investment should achieve:

1 Security – Because this money will be needed in the near future, safety and security of the principal is essential

2 Growth – It's inevitable that the cost of living will continue to increase each year so it's important to ensure the money continues to grow to offset the effects of inflation

3 Accessibility – Since the money will be used to fund living expenses, it's important to have convenient and timely access to cash when it's needed

4 Effort – Spending time managing your cash flow during retirement probably isn't what you had in mind. Your short-term investments should require minimal effort to maintain.

HIGH-INTEREST ACCOUNTS FOR YOUR SHORT-TERM SAVINGS
Traditionally, Canadians have relied on a variety of financial tools to achieve these goals, ranging from lowinterest bank accounts to money market funds and government treasury bills. Each of these options has advantages but also involves a tradeoff among the four goals outlined above.

Recently, however, Canadians have been turning to a relatively new option for short-term cash management: high-interest bank accounts. High-interest bank accounts are exactly what you would expect – bank accounts that offer a much higher rate of interest than the typical 0 per cent to 0.25 per cent that most accounts pay.

A primary reason why these accounts have become so popular is that they address each of the four goals so well:

• Security – Most high-interest accounts are offered by large, secure financial institutions and, for added security, government deposit insurance may be available
• Growth – There's a high rate of interest to keep your money growing
• Accessibility – Depositing and withdrawing cash is almost as easy as with any other bank account. Most high-interest accounts offer a broad range of transaction options, such as telephone and Internet transfers, ABM withdrawals, chequing and even debit payments. People who are reluctant to give up "branch banking" can still benefit from a high-interest account by keeping the bulk of their short-term savings in a high-interest account and then using the phone or Internet to transfer money to their traditional account when it's needed
• Effort – There are no maturity dates to monitor and no need to visit a financial institution. Managing your cash with a high-interest account requires much less effort than some other options

FIND THE OPTION THAT'S RIGHT FOR YOU
Managing short-term cash effectively is key to ensuring that your retirement finances are safe, protected against inflation and convenient. The emergence of high-interest bank accounts means that you now have one more option for structuring your retirement finances. Clearly, there isn't one option that is right for everyone. Your financial advisor can help you understand each of the options and find the one that best meets your needs.

The table on the following pages outlines six of the most popular short-term investment options available to Canadians and how each fares against the four goals. For each investment option, each of the four goals has a star rating from one (worst among the options listed) to five (best among the options listed), plus a brief commentary. The table also outlines which type of investor might choose each of the six investment options.

SHORT-TERM INVESTMENT OPTIONS * worst among the options listed ***** best among the options listed 

Option	What is it?	Security	Growth potential
High-interest bank account	High-interest bank accounts typically provide most of the features of traditional bank accounts but pay a much higher rate of interest.	**** Government deposit insurance may be available.	***** A high, variable interest rate is among the best returns provided for short-term cash.
Treasury bill (T-bill)	T-bills are short-term investments (typically one month to one year) issued by the federal government. The government sells T-bills at a discount and then pays you the face value at maturity. Although the return is a capital gain, it's treated as interest income for taxation purposes.	***** T-bills, backed by the Government of Canada, are among the most secure short-term investments available.	***** You'll typically earn a good return compared to other short-term investments. Your return is fixed if the investment is held to maturity. However, if you need to sell your T-bill prior to maturity, the price you get will be determined by the current level of interest rates, among other things.
Traditional bank account	A traditional bank account provides a number of convenient deposit and withdrawal options but typically pays little or no interest.	**** Government deposit insurance may be available.	* Traditional bank accounts provide little-to-no investment growth.
Cashable Guaranteed Investment Certificates and Guaranteed Interest Contracts (GICs)	Cashable GICs, offered by banks and insurance companies, pay a fixed rate of interest for a specified period.	**** Government deposit insurance may be available. Cashable GICs offered through insurance companies may provide estate planning benefits and potential creditor protection.	**** Cashable GICs provide a fixed interest rate for the specified term. However, a surrender charge may be charged if a cashable GIC is redeemed prior to maturity.
Money market fund (MMF)	MMFs are mutual funds that invest in secure short-term investments such as T-bills. Most mutual fund companies offer at least one MMF.	*** While MMFs are more secure than other types of mutual funds, they have no government backing or deposit insurance and so are less secure than other options discussed here.	*** The investment growth is determined by the performance of the securities held within the fund. MMFs charge a management fee that reduces the investment return. As a result, the return is often lower than with some of the other options.
Canada Savings Bond (CSB)	CSBs are secure, short-term investments offered periodically by the Government of Canada. CSBs have a fixed maturity date and the government announces a new interest rate each year. CSBs can be redeemed for cash at any time.	***** CSBs, backed by the Government of Canada, are among the most secure short-term investments available.	*** The interest rate is typically lower than many other short-term investments. No interest is payable if the CSB is redeemed in the first three months and no interest is earned in the month in which the bond is redeemed.

SHORT-TERM INVESTMENT OPTIONS * worst among the options listed ***** best among the options listed

 

Option	Accessibility	Effort	Why choose this option?
High-interest bank account	**** Deposits Deposits can be made through ABMs, mail or with electronic transfers. There is generally no minimum deposit. Withdrawals With some accounts, withdrawals can be made through chequing, ABMs, debit purchases, electronic transfers, etc.	***** With the exception of branch banking, high-interest accounts are as easy to use as a traditional bank account.	A high-interest bank account is a good option if you: Want to earn a good return Want to maintain easy access to your cash Are comfortable managing your cash using the telephone or Internet
Treasury bill (T-bill)	*** Deposits T-bills can be purchased in increments of $1,000 of face value. Withdrawals Cash can be accessed by selling one or more T-bills on the open market. Cash is generally accessible the next business day but, if a need for cash arises on a weekend or holiday, it may take a few days to get your cash	** T-bills have maturity dates that must be monitored and managed. Purchasing and selling T-bills must be done through a financial intermediary and takes more effort than some other options.	A T-bill is a good option if you: Want to earn a good return on your short-term money Enjoy actively managing your short-term investments Are unlikely to need cash before the investment matures
Traditional bank account	***** Deposits Deposits can be made in person at a branch, through ABMs or with electronic transfers. There is no minimum deposit. Withdrawals Withdrawals can be made in person at a branch, through chequing, ABM withdrawals, debit purchases, electronic transfers, etc.	***** There are no maturity dates or interest rates to manage. It's easy to deposit and withdraw money in a variety of convenient ways.	A traditional bank account is a good option if: Your primary concern is ease of access You expect to conduct several transactions per month You're not looking for any investment growth
Cashable Guaranteed Investment Certificates and Guaranteed Interest Contracts (GICs)	*** Deposits Cashable GICs must be purchased in larger increments (often starting at $500). Withdrawals Penalty fees may apply and transactions may take a few days to complete. Access to cash varies between banks and insurance companies. Bank GICs – must redeem whole amount. Insurance company GICs – may redeem partial amounts.	*** Cashable GICs have maturity dates and interest rates that must be monitored and managed. Some features, such as automatic rollovers and laddered accounts, can reduce the effort required. Transactions require formal purchase and redemption requests.	A cashable GIC is a good option if you: Want to earn a good return Are unlikely to redeem the GIC prior to maturity Want to lock in an interest rate for a fixed period
Money market fund (MMF)	*** Deposits Deposits are typically made by providing a cheque to the mutual fund company. There may be a minimum deposit required. Withdrawals To access cash, the fund must be sold and cash transferred into your bank account. This may take a few days.	*** There are no maturity dates to manage but transactions require formal purchase and redemption requests.	An MMF is a good option if you: Want to integrate your short-term savings with your non-registered investment plan Aren't likely to have an urgent need for money Aren't concerned about earning the best possible return
Canada Savings Bond (CSB)	** Deposits CSBs are only available for specified sales periods each year, which limits opportunities for purchase and additional contributions. Withdrawals Redemptions are limited to regular business hours at the institution that sold you the investment. To access cash the full bond must be redeemed – you cannot redeem a portion of the bond.	** CSBs have maturity dates and interest rates that must be monitored and managed. Each purchase and redemption of a CSB requires a visit to a financial institution.	A CSB is a good option if you: Want an investment that is secure Don't have a need to make additional contributions throughout the year Aren't concerned about earning the best possible return

IT PAYS TO SHOP AROUND
Many Canadians are choosing to move their cash investments to high-interest bank accounts to take advantage of the unique combination of security, growth accessibility and convenience. There's a wide variety of high-interest bank accounts available in Canada and some of the best high-interest accounts are only sold through financial advisors. Before you select a highinterest bank account, do your homework to ensure you understand all of the features and restrictions. Better yet, ask your financial advisor to do the homework for you. Your advisor can explain the various features of highinterest accounts and help you choose the one that's right for you.