Is now the time for retirees to sell stocks and buy GICs? + MORE Aug 10th

Guaranteed investment certificates (GICs), like other fixed-term investments, carry something called “interest rate risk.” If you have $20,000 to invest in GICs, for example, you have to decide whether to lock that money up for one year, two years, five years or even longer—but it’s very difficult to predict where interest rates are going.

If longer-term rates are higher, you may be tempted to go with those, but then you run the risk that rates might go up in the interim, and you’d be stuck earning less. Or maybe interest rates are really good now, but you’re worried that when your GIC matures in five years, you’ll be stuck renewing at a much lower rate.

Rather than guess, you can deploy a common investment strategy: GIC laddering.

sponsoredMCAN Wealth 1-year non-registered GICgo to site

Interest rate: 5.10%

Minimum amount: $1,000

Eligible for CDIC coverage: Yes

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Setting up a GIC ladder

When you “ladder,” you stagger the maturities on a series of investments (as with bonds or GICs)…

Ask MoneySense
My husband is retired and concerned that his money that is invested in his RRSP and TFSA is fluctuating too much. He is retired and is wondering if his funds should be in a GIC account as it’s paying 4% and not losing principal. He’s concerned in this volatile market.—Rodeen

Are GICs a good idea for retirement?

As you noted, Rodeen, guaranteed investment certificate (GIC) rates have risen to levels we have not seen in over 15 years. That said, they are starting to decrease and look poised to decline further over the balance of 2024 and into 2025. There are one- to five-year rates that are between 4% and 5%, and even slightly over 5% if you shop around. You may not get these rates at major banks, where rates may be 1% to 2% lower than that, but trust companies, credit unions and online banks generally offer a healthy premium to the big banks.

Are GIC rates going up in Canada?

At the start of 2022, GIC rates were just starting to rise but were still less than 3%…

Ask MoneySense
I’m 60 right now. And, if I buy an annuity for $100,000, it appears I can get about $510 per month, according to the best quote I see, which is $6,120 a year. If I take the same $100,000 and get 4.2% interest on it at current rates, I can take out $536 a month for 25 years, which is my life expectancy.

It seems a DIY approach is about the same as the annuity, with the caveat that I might live longer but I also might die sooner.

Do you agree with the numbers above and what would you advise on what is better?

—Mark

Annuities versus GICs: The differences that could affect retirement

This is a good question, Mark. I agree with your numbers, and based on the way you’ve done your comparison, an annuity and a guaranteed investment certificate (GIC) appear very similar. However, there are some differences to consider. Once you’re aware of the differences, and how those differences align with you and your lifestyle, you’ll have a better sense of which one is right for you…

Ask MoneySense
Can you write an article on how family RESPs work once the oldest children start to take money out of the plan while for the youngest we are still putting money into the plan?

What are the rules? Can you find one child with more money from the plan than another child? If one child does not go to post-secondary can their funds be used to fund one of the children in the plan?

—John

How a family RESP works

Good question, John. It’s surprisin g how few people know the withdrawal dynamics of an individual registered education savings plan (RESP), let alone how a family plan works.

Just to bring everyone up to speed, a family RESP is a tax-deferred education savings investment account with annual government grants that has multiple beneficiaries. A beneficiary can qualify for grants of 20% or more of a contribution, subject to both annual and lifetime limits, historical contributions, age, income, and province or territory of residence.

A family RESP is generally opened by parents or grandparents, though technically can be opened by a sibling, however unlikely…

As Canada’s financial services sector expands to include new online banks, credit unions, robo-advisors, brokerages and more, so does the likelihood that you have a ragtag number of registered savings plans with multiple institutions. For example, you may have set up an employer-sponsored plan at work, opened a guaranteed investment certificate (GIC) on your own to make a quick contribution before that tax year’s deadline, and invested in another RRSP through your financial advisor.

While in some sense this falls into the category of good problems to have—the more you sock away in retirement savings, the better—it might not be in your best interest to leave those funds fragmented across various providers. “When we talk about diversification, we mean diversifying by asset class. But diversifying by institution can actually be detrimental,” says Morgan Ulmer, a financial planner in the Calgary office of fee-for-service firm Caring for Clients.

To start, there could be a cost issue…