Guaranteed Investment Certificates, or GICs, are a form of investment where you agree to lend money to a bank or Insurance company for a set amount of time. The bank agrees to pay you a certain percentage of interest to borrow this money. The amount of time might only be 90 days or as much as 10 years. You will most often receive a higher interest rate for a longer time commitment.
Since you are agreeing to lend your money for a certain amount of time, there are often downsides to breaking that agreement and withdrawing your money early. With some GICs, there may be a penalty or you may earn interest only if it pays out at maturity. If there is a possibility of needing the money earlier, you might want to look into redeemable GICs. Redeemable GICs allow you to withdraw your money without penalty, however they will likely pay less interest.
Guaranteed Investment Certificates may be a good investment choice if you want a safe, short term, place to save your money. GICs could be used as a part of a fixed income portion of your portfolio, or simply to hold your money while you decide what you’d like to do with it for the long term.
The risks when investing in Guaranteed Investment Certificates
GICs have a guaranteed interest rate and the principal is insured by the CDIC. However, inflation rates and lack of preferential tax treatment are risks associated with Guaranteed Investment Certificates. Inflation rates can potentially be higher than the guaranteed interest rate of the GIC you invest in. This would actually mean you are losing money after adjusting for inflation. GICs are taxed at your marginal tax rate, so you may want to consider placing them in an RRSP, TFSA or RESP to shelter the interest you earn.
How to invest in Guaranteed Investment Certificates
Since GICs provide higher interest rates when locked in for a longer period of time, you may want to consider building a Guaranteed Investment Certificate ladder. To do this, you split your money available to invest into five equal portions and invest those amounts into 1, 2, 3, 4 and 5 year GICs. From that point, you are set to decide each year whether to reinvest your annual amount for another 5 years. If rates are good, you could continue reinvesting for 5 year terms. When rates are low, you may decide to move your annual amount to a different investment. By building a GIC ladder, you have the benefit of the long term high rates and the flexibility of access to a portion of your investment each year.
While not very attractive with the current interest rates available today, rates will eventually come back up to the pre-recession levels. Once interest rates have moved back into normal territory, you might decide that Guaranteed Investment Certificates would be a worthwhile addition to your portfolio leading into retirement.
Did you know that you can buy Segregated funds with your RRSP money, which guarantees partially or fully (depending on the plan) the capital you invested, so you can invest in more aggressive funds without worrying of losing your capital, some plans even offer that if your fund did well, for instance if after 3 years you made a 50% return on your capital you may be able to lock in the now total amount of your money in the fund as your new capital amount to be guaranteed, though the amount of years for the money needed to be locked in the fund will also restart, for more info on this contact us.
What does retirement look like for you? Maybe it means traveling the world. Perhaps you will finally build that greenhouse you’ve always wanted, or maybe you will take up photography.
Your vision for retirement is an important step in planning for the last 30 years of your life. There are many different “formulas” to calculate what kind of income you will need for retirement, but it won’t replace the value of a good discussion with a financial security advisor, about your personal dreams, when you want to retire and what you want to do.
If you are nearing retirement this year, you will need to do some practical planning for your retirement income needs. Here’s a list of seven questions to ask yourself:
- How soon do you expect to retire, and how many years should you be planning for? If you retire early, your retirement savings will need to last longer.
- Will you be staying in your current home, or will you be downsizing or moving? Consider what your shelter costs will be in the coming years.
- What outstanding debts will you have at retirement?
- Do you plan to work part-time, or earn any occasional income? Does your favorite hobby have any financial rewards?
- What are the top three activities you envision for your retirement and what will it cost to pursue them?
- If you are married, do you have a financial plan in place that addresses the potential financial impact of the death of either of you?
- How important is it to you to provide for loved ones through an inheritance of some kind? Consider how much you hope to leave to your beneficiaries.
The level of retirement income you will require will depend on many of these factors. Keep in mind – as you think about these questions – that you may be looking forward to 30 or more years of retirement. Break that time into increments of at least 10 years to get a sense of the different activities and financial demands of those different phases of retirement. Typically, you will want to spend more money in the early years of retirement, when you are active and healthy, but the costs for care can accelerate in the later years of retirement. Fortunately, there are new products that help to address these long retirements, and the conflicting needs.
Are volatile markets keeping you awake at night? If you’re like most, your goal is to accumulate enough wealth during your working years to allow you to enjoy the lifestyle you want once you retire. But life doesn’t have to be filled with sleepless nights worrying about which investments to buy and which ones to dump.
Get asset allocation working for you
Asset allocation is the real life example of the old phrase “don’t put all your eggs in one basket,” and refers to an investment strategy that focuses on dividing investments among different kinds of assets such as stocks, bonds or cash to optimize your risk/reward trade-off. Many experts believe that asset allocation is the single greatest determinant of investment performance. This concept has received considerable attention and as a result, new products have become available in the marketplace. Single funds or managed portfolios are often designed to accomplish the goals of asset allocation within a single investment product.
Lower risk while maximizing returns
By having money invested in a variety of assets which respond differently to market conditions there is a better chance of maximizing growth and minimizing the impact of market ups and downs on portfolios. How much is invested in each asset type depends on investment personality, financial goals, and risk tolerance. For example, if you are young and years away from retirement, you are probably interested in maximizing the growth of your portfolio. If you also have a high tolerance for the ups and downs of the equity markets, you are a good candidate for an asset allocation strategy that is heavily weighted in equity funds or investments. Even if you hit a few down years in the market, you have time on your side to reap the benefits of the up years. On the other hand, if you are nearing retirement, you may be more interested in protecting the wealth you have accumulated. your tolerance for risk may be relatively low, and a more conservative mix of assets might be more appropriate. Age alone, however, is not always a reliable guide to a suitable asset allocation strategy. Many older investors have a high tolerance for risk, and many younger investors have investment goals that require a low tolerance for risk.
The benefit of asset allocation funds
Financial firms have developed various asset allocation funds or portfolios to meet the needs of the different types of investors. Low-risk funds typically consist of a higher percentage of money market and bond investments. Returns are lower but are more predictable (therefore, less risk). Conversely, high-risk asset allocation funds are likely to invest heavily in stocks in order to maximize the potential for return. It’s important to look for the right asset allocation product to meet your personal goals. For example, Insured Portfolio Funds offer a complete range of asset allocation portfolios conservative, moderate, balanced, growth and aggressive. It can make good sense to take advantage of these structured asset allocation portfolios, because of the expertise they are built on and managed by. A team of investment professionals monitors the funds. They use computer models to watch how various investment components interact and contribute to the overall performance. These models help to identify the mix of asset classes and investing styles that is most likely to provide the greatest long-term return for each target level of risk, and in some cases, fulfill other financial objectives.
Your best asset allocation strategy begins with a visit to your Financial Security Advisor, whose expertise will be invaluable to you. Revisit your strategy regularly, and build a plan to keep it on track. Whatever the objective, a good asset allocation strategy can help you reach your financial goals while letting you sleep at night.
Wayne Gretzky once said, “You will always miss 100% of the shots you don’t take.” Coming from someone who holds more scoring records than any other player in history, that’s pretty good advice.