All About GICs - What Are GICs & Who Are They For?

February 25, 2020

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What are GICs?

Term deposits, also known as Guaranteed Investment Certificates, or GICs, are one of the safest ways to save money. Unlike mutual funds, they offer a guaranteed return, in the form of interest. You decide how long of a term you would like to invest for BUT you can’t access your investment until the end of that term.

GICs are usually invested between 1 and 5 years. Typically, the longer the term you choose, the higher the interest rate that you’ll receive. Savings accounts, on the other hand, can be accessed anytime and therefore pay less interest.

Who are GICs for?

Maybe you’re saving up for a house or a car in the next few years. Maybe you’re retired and would like to have predictable RRIF income without any risk. Maybe you just don’t want to take any risk whatsoever. If that sounds like you, GICs are a great solution!

There are situations, however, where GICs might not be the best choice. Historically, GICs have significantly underperformed mutual funds over longer periods of time. This means that if you don’t need access to your investment (or a portion of your investment) for 5 years or more, GICs likely aren’t the right solution for you.

Are GICs a good investment? Let’s look at an example of investing in GICs & GIC rates

Say you’re planning to retire in 10 years. You have $100,000 in your chequing account earning no interest. You want this $100,000 to help fund your retirement. What are your options?

Let’s assume that GIC rates are the following:

  • 1 year: 2%
  • 2 years: 2.2%
  • 3 years: 2.4%
  • 4 years: 2.6%
  • 5 years: 2.8%

And these are your investment options:

  1. Leave things as they are.
  2. Invest the entire amount into a 1-year GIC. Re-invest each year for another year.
  3. Invest $20,000 in a 1 year GIC, $20,000 in a 2 year GIC, $20,000 in a 3 year GIC, $20,000 in a 4 year GIC, and $20,000 in a 5 year GIC. Each year you will re-invest the GIC coming due for another 5 years. This is called laddering. We’ll have all GICs mature after 10 years for this example.
  4. Invest $10,000 in a 1 year GIC, $10,000 in a 2 year GIC, $10,000 in a 3 year GIC, $10,000 in a 4 year GIC, and $10,000 in a 5 year GIC. The other $50,000 will be invested in a balanced mutual fund earning 5% per year. After each year, re-invest $10,000 from the GIC coming due into a GIC for 5 years. All GICs will mature after 10 years here as well.

How much do you have after 10 years?

  1. This one’s easy. Since you aren’t earning any interest, you will still have $100,000 after 10 years. Nothing to write home about.
  2. This is pretty straightforward as well. You are benefitting from compound interest, but it’s barely keeping up with inflation. Your money will have grown to $121,900. Okay, now we’re talking.
  3. Things start to get a little bit complicated here. By using a laddering approach, you will have $123,340 after 10 years. Even better!
  4. Now for the magic. By combining a laddering approach with a mutual fund investment, the GICs will have grown to $61,670 and the mutual fund will have grown to $81,445 for a grand total of $143,115. WHOA!

The bottom line

Are GICs worth it? Yes — there could be a place in your portfolio for GICs regardless of your age, net worth, or risk tolerance. A financial coach at Libro can help you with the roadmap to reaching your goals including the different types of accounts and investments that will get you there.

By Jared Dally

Jared Dally is a Financial Advisor at Libro Credit Union in Sarnia.