With GIC rates reaching levels we haven’t seen in years, many retirees are asking the same question: should you buy GICs right now?
One-year GICs are paying over 5 percent. It sounds tempting, but the answer isn’t as simple as it looks. There are a few important things to consider before locking in.
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What is a GIC?
A GIC, or Guaranteed Investment Certificate, is a term-based investment that pays you a set interest rate for a defined period. Terms can range from 30 days to 7 years.
There are two types of GICs:
- Redeemable GICs: You can access your money early, but rates are lower.
- Non-redeemable GICs: Your money is locked in, but you usually earn more interest.
For many years, the problem with GICs was that their returns were negative after accounting for both taxes and inflation. So are today’s higher rates finally good enough?
Let’s break it down.
The real return on a 5.4% GIC
Imagine you invest $100,000 into a one-year GIC at 5.4%. By the end of the year, you’ll have earned $5,400 in interest.
Now let’s assume this GIC isn’t inside a TFSA or RRSP, so it’s fully taxable. If you’re in a 30% tax bracket, you’ll owe about $1,620 in tax, reducing your after-tax return to $3,780.
Next, consider inflation.
In October 2023, Canada’s inflation rate was reported at 3.1%. But inflation on essential goods like groceries was closer to 5.6%. If we use that as a realistic inflation rate, you’d need $105,600 just to maintain your purchasing power one year later.
With your net amount now at $103,780, you’ve effectively lost $1,820 in purchasing power. That’s a negative real return of 1.82%.
So does this mean you should skip GICs entirely?
Not necessarily.
It depends on your timeline
If you need to use your money within the next five years, GICs are a solid option. That’s because the key priority in that case isn’t growth — it’s stability. You want to avoid market volatility and know exactly what your return will be.
But if you don’t need the money for five or more years, there may be better options.
Balanced portfolios offer better long-term returns
For retirees with a longer time horizon, a balanced portfolio is a better fit. This typically means 60% stocks and 40% bonds or conservative investments.
The benefit of including some equity exposure is that over time, you’re more likely to earn a positive return after taxes and inflation.
That said, balanced portfolios do fluctuate in value. You could see negative returns in some years. That’s why it’s important to only invest in them if you don’t need to access the funds for five years or more.
If you give yourself that runway, history is on your side. In fact, between 1935 and 2021, there has never been a five-year period where a balanced portfolio posted a negative return.
Final thoughts
If you need access to your funds in the next five years, using GICs makes sense, even if you lose a little bit of purchasing power to inflation. The stability they provide can be worth it.
But if you have a longer time horizon, there are better options. A balanced portfolio gives you a chance to grow your money and keep pace with inflation, even after taxes.
The bottom line is that GICs can absolutely play a role in your retirement plan, but they shouldn’t be the default choice for all your investments.
If you want to learn how to use GICs strategically as part of a broader portfolio, visit our website and book an appointment with us.
