Are GICs worth it? When some people think of investing, they tend to think of it as a high-risk strategy. Often, we associate investments with the stock market which can be incredibly volatile. While some people love to invest in stocks, others shy away from it, prioritizing security over the risk that comes with potential growth. This is where Guaranteed Investment Certificates (GICs) come in. But, what is a GIC and are GICs worth it? Read on to learn more.
What is a GIC Investment?
GIC stands for Guaranteed Investment Certificate. GICs are considered to be one of the safest investment options for Canadians because they are guaranteed. So, what does this mean? It means that you are guaranteed to walk away with, at minimum, the same amount of money that you originally invested. Usually more, but how much more depends on the type of GIC you choose. It’s worth noting that GICs are a type of term deposit since your money is tied up for a set time.
How do GICs Work?
A GIC is sort of like a high interest savings account except when you choose to invest in a GIC you are choosing to lock away your investment for a certain period of time (term) and get a higher interest rate for it. The term can last anywhere from 30 days to 10 years making GICs a very flexible option for short and long-term investing.
While your money is locked away it will earn interest. Typically, this rate is pre-determined when you start your GIC so you know exactly how much you will earn on your investment, but it can change depending on the type of GIC you choose. The longer the term, the higher the interest rate.
Most GICs lock your investment in for the entire chosen term. This means you cannot access it like you could a HISA. If you do need to access the money, you need to get permission from the financial institution. It’s up to them to choose whether or not to allow you to break your contract. If you do break your contract and withdraw prior to the end of the term, you will lose either all or part of your earned interest.
When people ask are GICs worth it, some people will say yes, while others will say no. You need to think of GICs as one available option that could work well for your portfolio depending on your goals.
Types of GICs
There are a few different types of GICs. While most work the same way: invest for a term & earn interest, there are a few options to choose from that might be better for some circumstances.
A cashable GIC is a very flexible GIC option. The lock-in period is short, usually just 30-90 days. With cashable GICs, you can actually make a withdrawal before the term is up. You will earn interest up until the point of withdrawal without penalty. Keep in mind, since it is more accessible, the rates are often quite low. Cashable GICs can be handy for those who think they may need the money before the term is up.
Similar to a cash GIC, redeemable GICs allow you to withdraw early. There is no lock-in period at all with a redeemable GIC, however, the interest you earn depends on how long you keep it in. Banks have low rates for early redemption. Again, even though interest rates are low the accessibility makes it a good option for those who think they may need access to the money sooner.
A non-redeemable GIC is your typical GIC that gets locked away for the entire term. Again, the term can be anywhere from a month to 10 years. Since the money is considered to be inaccessible, the interest rates for non-redeemable GICs are higher than redeemable and cashable GICs. The longer the term, the better the rates.
Market-linked GICs, also referred to as equity-linked GICs, are considered to be the riskiest GIC option. This is because the interest you earn is not pre-determined by your term. Instead, it’s tied to stock performance which means you have the potential to earn more than you would with a typical GIC rate, however, it also means you can lose interest and end up with very low returns. No matter what, you will still walk away with the money you put in.
What is the Difference Between Registered and non-Registered GIC?
Once you decide what type of GIC you want to choose you then need to decide what kind of account you would like to open your GIC in. GICs can be opened in both registered and non-registered accounts. Both have their pros and cons.
A registered GIC is held in a government-registered account. So, RRSP, TFSA, or RESP. The biggest advantage of choosing a registered account is the tax break. RESP and RRSPs are tax-deferred while a TFSA is tax free. The interest earned on GICs are taxed higher than other investments so this is a definite advantage. The downside, however, is that your money won’t be easily accessible even once it matures if you use an RRSP or RESP. You also need to be mindful of contribution limits and age requirements.
A non-registered GIC is basically a GIC held in a non-government registered account. Unfortunately, that means that non-registered GICs are subjected to the full taxation upon maturation. However, non-registered GICS are also more liquid upon maturation plus you don’t need to be concerned with contribution room or age limits.
Pros and Cons of GIC Investments
Like any other investment option, GICs come with pros and cons. Here are the main points to be aware of.
- Low risk- considered to be a very safe investment option
- Guaranteed-at the very least you will get your principle back
- Wide range of term options makes them ideal for short and long-term goals
- Can invest in registered and non-registered accounts
- Not a very liquid investment option
- Lose some or all interest if you withdraw early
- Very low interest rates compared to other investment options
GIC Strategies: GIC Laddering
So are GICs worth it? GICs are a pretty safe investment option, but there are still some strategies in place to make the most of them. The most popular GIC strategy is called GIC laddering.
GIC laddering is when you take the total sum of the money you plan to invest, divide it into 5 equal investments, then invest each chunk into 1-5 year GIC investments. Once each investment matures, you will reinvest it for a 5-year term and just keep repeating the process. This way, you always have 1 investment maturing every year but you are also taking advantage of the higher interest rates that come with longer terms.
GIC Laddering Example
Say you have $10,000 to invest. It will look like this.
|$ Invested||Today||Year 1||Year 2||Year 3||Year 4||Year 4|
|$2,000||Invest for 1 year||GIC matures, reinvest for 5 years|
|$2,000||Invest for 2 years||GIC matures, reinvest for 5 years|
|$2,000||Invest for 3 years||GIC matures, reinvest for 5 years|
|$2,000||Invest for 4 years||GIC matures, reinvest for 5 years|
|$2,000||Invest for 5 years||GIC matures, reinvest for 5 years|
For this example, let’s say the GIC interest rates are as follows:
- 1 year: 1%
- 2 years 1.25%
- 3 years: 1.5%
- 4 years: 1.75%
- 5 years: 2%
If you add up the total interest rates (7.5%) and divide by your 5 investments, you will get an average annual return of 1.5% for your first year. That’s 0.5% higher than what you would get had you invested the entire amount into a single 1 year GIC.
As you continue to re-invest these GICs into longer terms, you’ll still have one maturing every year and your average annual interest rate will increase.
By the end of the 5-year period, all your GICs will be now be invested into 5 year terms (with different maturation dates). So, if the rates stay the same (2%) then your average annual return for 1 year will now be 2% which is 1% higher than the 1 year GIC rate.
Of course, interest rates probably won’t stay the same over 5 years. Ideally, they will increase but they could decrease as well. However, since your different investments mature at different times this allows you both the opportunity to take advantage of higher rates each year, but also some protection if the rates are lower since you also have money already invested.
Are GICs Worth it?
So, are GICs worth it? Some people love them because they are such low risk. Others aren’t as big a fan because they can make more money through other investment methods. It really depends on your goals and how much risk you are willing to take. There are a few instances where GICs can be a very smart investment.
- GICs are great for short-term investments for a specific goal such as a wedding 2 years down the road, home renovations, or a vacation.
- If you are someone who struggles to save, the locked-in factor of GICs can help you keep your hands off your money.
- GICs are also great for individuals who are too nervous to invest in the stock market.
- Since GICs are guaranteed and such a low risk, they can work well for retired Canadians.
GIC investments can be a great investment vehicle to help you reach your savings goals- both short and long term. At the end of the day, they are best for those who value security over growth. That being said, whether you are a low-risk or higher-risk investor, having a couple of low risk investments like GICs is good for a diversified investment portfolio.