Maximize Retirement By Minimizing Cash Drag

Subscribe Now

Hello everyone and welcome to the Retiring Canada Podcast!

In today’s episode, we’re going to discuss how cash drag is clawing back your investment returns.

Specifically, we’ll explore:

• What cash drag is and how it impacts your retirement nest egg.

• The three areas where we often find excess cash—some of it hidden.

• How much cash you really need to keep as a reasonable buffer for ongoing needs.

• A misguided reason some investors hold too much cash.

• A simple example to show exactly how much you might be missing out on.

• And finally, a few action items to help you get your money working harder for you.

I want to help unravel an investment structure that may be holding back your portfolio’s true potential—and at its worst, impacting your ability to enjoy sustainable, long-term retirement income. It’s called cash drag.

What Is Cash Drag?

In its simplest form, cash drag is the portion of your portfolio that isn’t invested. This could be pure cash or even funds parked in high-interest savings accounts. While some cash in a portfolio is necessary—such as for an upcoming RRIF withdrawal or a large planned expense—too much can pull down your overall return.

Scenario 1: Excess Cash in Your Bank Account

A common form of cash drag occurs when households keep too much money sitting in chequing or savings accounts.

How much is too much? A good rule of thumb is to maintain 3 to 6 months of living expenses as a cash buffer.

• If your monthly spending is $15,000, a reasonable range is $45,000 to $90,000.

• If you spend $7,500 per month, you’d likely need $23,000 to $45,000.

Any money above this amount could be working harder for you—either through investments or, at minimum, a high-interest savings fund. Otherwise, inflation erodes its value every single day.

Scenario 2: Excess Cash in Your Investment Accounts

Another place cash tends to accumulate is within investment accounts. While holding 1% to 5% in cash for fees or near-term expenses is normal, anything beyond that is likely reducing your overall returns.

Scenario 3: Hidden Cash Inside Your Investments

Even within mutual funds and ETFs, a portion of your money is held as cash for liquidity needs. This can range from 1% to as high as 7% depending on the fund. For instance:

• RBC Select Balanced Portfolio: 2.2%

• Fidelity Canadian Balanced Fund: 1.78%

• Mawer Balanced Fund: 2.4%

• AGF Global Select Fund: 7.4%

If you hold $2 million across multiple funds with an average of 2.5% in cash, that’s $50,000 sitting idle. Over 25 years, this seemingly small drag can cost you nearly half a million dollars in missed growth.

The Illusion of "Dry Powder"

Some investors hold excess cash, waiting for the next market correction. The problem? Timing the market is nearly impossible, and in the meantime, you could be missing out on years of growth. As Peter Lynch famously said:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

Case Study: A $1 Million Difference

Recently, we worked with a couple in their early 60s who had amassed $3.25M in retirement savings. After reviewing their finances, we discovered:

• $250,000 in savings accounts.

• $150,000 in cash or high-interest funds in investment accounts.

• $75,000 of hidden cash inside mutual funds.

That’s $475,000—15% of their portfolio—sitting idle. By repositioning $369,000 of that cash into investments, we projected nearly $1 million in additional value over 25 years.

Take a close look at:

1. Your bank accounts.

2. Your investment accounts.

3. The funds inside your portfolio.

If you find excess cash, ask yourself if that money is really serving a purpose—or if it’s just dragging down your future returns.

For the links and resources discussed please check out the link in the show notes or visit retiringcanada.ca

If you enjoyed the show please subscribe and leave us a 5 star review on your favorite podcast app

Be sure to sign up for my weekly retiring Canada newsletter

And hey, when it comes to your retirement, don’t take chances. 

Make a plan so YOU can retire with confidence.

All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.