Ladder your GICs

Guaranteed Investment Certificates (GICs) are not the most exciting product. They work sort of like savings accounts in that you deposit money and earn interest, except that the funds are generally locked in for between 1 and 5 years. On their own, they will likely generate much lower long-term returns than a diversified portfolio that includes stock.

But GICs do have their place. For one, they are one of the few investment products that are actually guaranteed. As the name suggests, they are guaranteed by the issuing financial institution. They are also generally insured by either the Canada Deposit Insurance Corporation (CDIC) or a provincial deposit insurance corporation. CDIC is backed by the federal government and each provincial corporation is backed by the respective provincial government. This makes them appropriate in situations where a portfolio of stocks and bonds would not be, such as saving to fund your living expenses for the next few years.

GICs are also often more tax-efficient than bond ETFs or mutual funds when held outside of registered accounts (e.g., TFSAs, RRSPs), so they can be used as part of a diversified portfolio that includes stocks.

The struggle most investors face with GICs is choosing the appropriate term. As you can see in the current rate table below from my credit union, the longer you lock in your funds, the higher the rate the GIC will pay.

Ideally, you would be able to get the 5-year rate on all your GICs, but five years is a long time. And if the GICs form part of your retirement income stream, you may want to get the highest interest rate possible, while still being able to access some of those funds every year.

So what can you do? One option is to set up a 5-year GIC ladder. To do this, you would use one-fifth of the funds to invest in each of the GIC terms, which would give you (using the rates above to illustrate):

  • A GIC (2.1%/year) maturing in 1 year
  • A GIC (2.15%/year) maturing in 2 years
  • A GIC (2.2%/year) maturing in 3 years
  • A GIC (2.3%/year) maturing in 4 years
  • A GIC (2.4%/year) maturing in 5 years

The next year, when the 1-year GIC matured, you would use those funds to purchase a 5-year GIC. This would give you:

  • A GIC (2.15%/year) maturing in 1 year
  • A GIC (2.2%/year) maturing in 2 years
  • A GIC (2.3%/year) maturing in 3 years
  • A GIC (2.4%/year) maturing in 4 years
  • A GIC (2.4%/year) maturing in 5 years

The following year, when the original 2-year GIC matured, you would use those funds to purchase another 5-year GIC. This would give you:

  • A GIC (2.2%/year) maturing in 1 year
  • A GIC (2.3%/year) maturing in 2 years
  • A GIC (2.4%/year) maturing in 3 years
  • A GIC (2.4%/year) maturing in 4 years
  • A GIC (2.4%/year) maturing in 5 years

When the original 3-year GIC matured, you would use those funds to purchase another 5-year GIC, which would give you:

  • A GIC (2.3%/year) maturing in 1 year
  • A GIC (2.4%/year) maturing in 2 years
  • A GIC (2.4%/year) maturing in 3 years
  • A GIC (2.4%/year) maturing in 4 years
  • A GIC (2.4%/year) maturing in 5 years

When the original 4-year GIC matured, you would use those funds to purchase another 5-year GIC, which would give you:

  • A GIC (2.4%/year) maturing in 1 year
  • A GIC (2.4%/year) maturing in 2 years
  • A GIC (2.4%/year) maturing in 3 years
  • A GIC (2.4%/year) maturing in 4 years
  • A GIC (2.4%/year) maturing in 5 years

Now you would have a portfolio of 5 GICs, all earning the 5-year interest rate but with a fifth of the funds becoming available every year. To maintain this, you would continue to use the available funds every year to purchase a 5-year GIC.

If you have an unorganized portfolio of GICs, it’s worth thinking about whether a GIC ladder would be a good fit for you.

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