Have you checked the interest rates on GICs lately? Today's low interest rate environment has made many investors hesitant to plunk their savings in GICs, especially with the paltry returns offered - but they remain a solid option for risk-adverse investors seeking a steady return, especially when locked in for the long term.
The Benefits of Not Cashing Out
There are several benefits to locking into a non-cashable GIC for the long term (30 to 40 months) that investors often overlook.
“Generally, the longer the term, the higher the interest rate. That being said, you want to look at the spread to see if it's worth going for a longer term,” says financial educator Jim Yih, owner of Retirehappy.ca and author of A Simple Guide on Guaranteed Investing.
Is Now a Good Time to Lock In Long Term?
With interest rates potentially rising within the next year, you may be wondering if it’s a wise move right now to lock in long term with GICs. The good news is with GIC laddering (buying into several GICs with one timed to mature each year), you don’t have to worry about timing the market.
“Ideally, GIC laddering is a strategy that allows you to diversify your GIC portfolio by going longer (terms) to get higher rates without compromising on some liquidity year to year," says Yih, adding, "The other thing I like about laddering is it takes the guesswork out of investing in GICs. I think trying to predict interest rate movements is like predicting the stock market."
He adds that while many economists point to rising central rates over the next year or so, investors are wise not to bank on higher interest rates in the short term - after all, rates predictors have a history of crying wolf.
“If you think about it, everyone has thought interest rates were going to rise for the past 10 years to 15 years and (they've) only risen once. Everyone thought interest rates would rise this year, but they haven't. Personally, I don’t know if rates will increase or not which is why laddering is such a good strategy.”
Long-Term vs Short-Term GICs
Much like choosing your mortgage rate term, deciding between a long-term or short-term GIC should depend on your specific financial situation. A good rule of thumb: unless you’re saving towards a short-term goal, locking-in with a long-term GIC often makes sense.
“Going with a shorter-term GIC is really about liquidity. Do you need access to the money?,” Yih aks.
“Sometimes there is no benefit to going with a longer term when the rate curve is flat. The incremental return to go longer is not there so sometimes a shorter term makes more sense.”
For a medium-length investment horizon (30 months): Fall Special "Save Happy" GIC from Meridian
At 2.50%, this GIC offers competitive, guaranteed returns to investors looking to lock in for a medium term. This GIC can be used within registered savings vehicles, like a GIC or TFSA, for tax-sheltered savings, and is non-cashable until the term matures. (Available in Ontario Only.) Click here to learn more>
For a long-term investment horizon (40 months): The Flex40 GIC from DUCA Get 2.75% interest on your $500 deposit with this flexible long-term option; those needing access to their cash can withdraw between six and 39.9 months at a rate of 1.75%. Click here to learn more>
Giving Your RRSPs a Boost
GICs can also inject higher returns into lagging RRSPs - but Yih cautions it's still important to diversify, and to diligently research when picking a GIC product. “I think rate shopping is very important. (Furthermore), it's important to make sure the institution is insured. I am a fan of laddering."
Sean Cooper is a pension analyst by day and financial journalist by night, living in Toronto, Ontario. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website.