Should You Use a Laddered GIC Strategy In Retirement? And 4 Alternatives To Consider
Sunday, March 03, 2024
Should You Use a Laddered GIC Strategy In Retirement? And 4 Alternatives To Consider
Sunday, March 03, 2024
Mitch Zaba
Bouncing in and out of popularity for retirees is a laddered Guaranteed Investment Certificate strategy.
Yes, the rise of interest rates have investors flocking to GICs once again. Especially those in or approaching retirement.
Why?
Because GICs have no downside risk.
Traditional GICs don’t participate in capital markets or bond markets (except at renewal) and therefore you get what you sign up for.
All you have to decide is your interest rate and its respective term.
Example:
You could get a 1-year GIC today for 5.5%. However, interest rates are expected to go down so the 3-year rate is currently lower at 4.95%.
How To Use A Laddered GIC Strategy In Retirement
Retirees can opt to use a laddered GIC strategy by initially buying 5 GICs then renewing them back into 5 year terms as each GIC reaches their maturity date.
Example:
You would start by buying a 1-year, 2-year, 3-year, 4-year, and 5-year GIC with 20% of your total retirement savings invested into each one.
Then, after 1-year, your first GIC will mature.
You will take enough cash for your living expenses then reinvest the remaining amount into a new 5-year GIC.
Rinse and repeat.
Note: In the first year, you will need to keep enough cash for your living expenses until your 1-year GIC reaches maturity.
GICs Do Have Their Drawbacks
First, any investment you make must take into account inflation. This is called real return.
Example:
A 1-year GIC rate could be 5.50% today.
Less inflation of 3%, your real rate of return is 2.50%.
Secondly, GICs do not offer any liquidity. If you need money before your GIC renews, you cannot make that withdrawal from your GICs.
Some institutions will allow early withdrawals but you’re likely going to forfeit your interest.
GICs also have reinvestment risk.
In a falling interest rate environment, your next 5-year interest rate could be much lower than your previous interest rate which means you will have to rely more on your principal instead of interest earnings to fund your retirement.
Finally, GICs do not offer capital gains. A GIC is interest income only.
Alternatively, you could consider investing in a bond which can pay an interest rate and appreciate in value.
Therefore you would receive interest and capital gains appreciation.
Alternative Low Risk Strategies to Laddered GICs
To address some of the issues with GICs here are some alternative low risk strategies to consider.
Laddered Bonds/ETFs
Laddered bonds are the exact same strategy as GICs except that bonds can also increase in value. In a falling interest rate environment, bonds become more valuable and can be sold to other investors seeking your high paying interest bond.
However, it can be difficult to find and buy bonds as well as interested investors so it’s easy to buy laddered bond strategies through mutual funds or ETFs (exchange traded funds). These types of funds do all the work for you while you maintain your liquidity.
High Interest Savings Accounts
If you think you’ll need access to some or all of your money, consider putting your cash into a High Interest Savings Account. Not to be mistaken with a savings account with your bank, High Interest Savings Accounts are linked to the Prime Rate from the Bank of Canada and are currently paying close to 5%.
Annuities
Annuities have also increased in popularity from higher interest rates. Annuities are offered by insurance companies. Annuity contracts pay a regular monthly income until the day you die in exchange for a lump of money upfront.
Annuities can be great if you want predictability and you think you might live past 85. However annuities don’t provide liquidity as the funds you give up are not accessible afterwards. As well, if you die early, traditional single life annuities don’t provide any estate value to your beneficiaries.
Low-Volatility Funds/ETFs
If you’re willing to move to an option that is slightly higher risk than GICs, low-volatility mutual funds and ETFs invest in companies that are less sensitive to market recessions.
In a low-volatility mutual fund or ETF, you will sacrifice some market upside for a more consistent predictable return. A company described as low volatility would have stable revenues, consistent positive earnings, and less share price movement compared to the broad market.
Example of this type of company:
Canadian Pacific Railway, Microsoft , Walmart and Visa.
Conclusion
Laddered Guaranteed Investment Certificates (GICs) provide safety and security in retirement. You know exactly what you’re going to receive when you GIC matures. However, GICs do not offer much protection against inflation or if you have a need for cash immediately.
If you want low-risk alternatives that address the risks of GICs, consider laddered bonds, high interest savings accounts, Annuities, or low-volatility mutual funds or ETFs.
Hi, I Am Mitch Zaba
Over the past 10+ years, we've worked closely with clients showing them how to grow their wealth, pay less taxes and how to create predictable passive income in the stock market.
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