GIC Laddering – An In-Depth Guide To A GIC Ladder Strategy

In today’s high-rate environment, plenty of Canadians are trying to extract maximum value from their portfolios and, even more so, their cash balances.

GIC laddering is a popular way to do so, and although it may seem complex, it is an easy investment strategy. In this article, I am to go over it in its entirety.

What is a GIC laddering strategy?

A GIC ladder is a financial strategy that investors utilize to boost the overall return on their Guaranteed Investment Certificates (GICs) without compromising all their liquidity. 

By breaking down a large sum of money into smaller chunks and investing each in GICs with varying term lengths, individuals can tap into the potential of higher payments typically offered by long-term GIC rates. 

This approach allows investors to have GICs maturing at regular intervals, providing frequent access to a portion of their money.

The structuring of a GIC ladder involves dividing an investment across several GICs with staggered maturity dates. 

For instance, instead of investing in a single five-year GIC, an investor can spread the investment across a one-, two-, three-, four-, and five-year GIC. As each GIC matures, the investor can either access the funds for cash flow needs or reinvest them into a new long-term GIC to keep the ladder going. 

The laddering technique is designed to reduce the risks associated with interest rate fluctuations, as it avoids locking in all your funds at one rate.

Think of each GIC you have as a rung on a ladder. Every rung on that ladder is a maturing GIC. Now, go a step further and think that every rung you step on goes to the top of the ladder, becoming one of the farthest maturing GICs. 

The ladder, in theory, would never end, and you’d have constant GICs maturing, which would provide ample liquidity. 

How to deploy a proper 5-year GIC ladder strategy

The process of a 5-year GIC ladder is easy. In reality, you could set it up in under 15 minutes, assuming you’ve done your research already and looked up the best rates.

Let me walk you through how to set up a proper 5-year GIC laddering strategy.

1. Set up your initial investment allocation

You want a consistent amount of cash flow from these GICs maturing. So, in a 5-year laddering strategy, you simply take your initial capital and divide it by 5.

If you have $100,000, you’ll be investing $20,000 in each GIC. If you have $5500, you’ll be investing $1100.

From there, you simply need to invest an equal amount into each GIC.

• 1-Year GIC: 20% of your funds
• 2-Year GIC: 20% of your funds
• 3-Year GIC: 20% of your funds
• 4-Year GIC: 20% of your funds
• 5-Year GIC: 20% of your funds

A tip for this step: Don’t feel the need to stay at one institution for your GICs. What I mean by this is that Equitable Bank is offering a solid 1-year rate, but you found a more attractive 5-year rate somewhere else. A laddering strategy works across multiple institutions.

2. Repeat the process when your shortest GIC matures

This is where some people get tripped up with the strategy. However, it is very simple. Once your 1-year GIC has matured, a year has passed. So, you’ll be left with the following:

• A 1-year GIC
• A 2-year GIC
• A 3-year GIC
• A 4-year GIC
• Your principle from the matured 1-year GIC and the interest earnings

From here, we can see that what we lack now is a 5-year GIC, as all of our existing ones have a year less term on them. You’re not buying a new 1-year GIC with your cash on hand; you’re buying a 5-year term.

That way, as mentioned at the start of this article, the ladder theoretically never ends. Every rung you step on (maturity) is brought to the top of the ladder.

So, in essence, you are always buying a new 5-year GIC with the matured capital if you want to continue the strategy.

3. Utilize cash as needed and simply repeat the process

Whether you invest the entire amount, that being interest and principle, back into the GIC ladder or you take the interest and either spend it or invest it elsewhere, like the stock market, the most important thing is that you simply keep repeating the process. That is if you still want to utilize the strategy.

It is now possible to narrow the timeline even further

Although the 5-year laddering strategy is the most popular, that is not to say it is the only one available. Feel free to utilize whatever timelines you want if you can find the maturities that work. 

For example, say you don’t want to tie your money up for five years. Equitable Bank has short-term maturities that go 3 months apart up until you get to the three-year point.

The only drawdown here is that GICs typically pay better interest rates the longer the timeline to maturity. What this means is you will likely earn less investing in their shorter-term GICs than you would a 5-year strategy.

Is GIC Laddering worth it?

Many people wonder, are GICs worth it? GIC laddering should also be considered in the mix of assets and strategies. The more people learn the more informed decisions they can make. GIC laddering is most certainly worth it in the fact that you can boost your returns. Let’s go over a quick example of how you can amplify the interest you earn on your investments made into GICs, all while providing reasonable liquidity and safety in the process.

Let’s utilize Equitable Bank’s current GIC rates as of late 2023 as an example. Keep in mind, by the time you’re reading this, these could be way outdated. But, the rates themselves are not what I want to highlight. It is simply the math to highlight the benefit.

Example 1: You don’t ladder

In this situation, you simply take your money and buy a 5-year GIC. Your money is locked up for 5 years, and you’ll earn a pretty respectable 5.05% annually.

Example 2: You ladder

Let’s assume you spread your money equally among all of these GICs. Before we mention the impacts on interest, let’s first mention that you have significantly more liquidity than example 1. In example one, you have no liquidity for 5 years. In this example, you will have 20% of your capital available to you every year.

Now, let’s work on the interest rates. We can go ahead and add together all of the interest rates to get our average rate across our money.

5.55 + 5.4 + 5.25 + 5.10 + 5.05 = 26.35%

Now, we can take this 26.35% and divide it by our 5 GICs to get our average interest rate across each one.

26.35%/5 = 5.27%

So, with this laddering strategy, not only have you added more liquidity across your investments, but you’ve also earned 0.25% extra than simply purchasing the 5-year GIC outright.

Types of GICs and their impacts on laddering

• Cashable or Redeemable GICs: Cashable GICs offer the option to cash out early without significant penalties.
• Non-Redeemable GICs: Typically offer higher interest rates but cannot be cashed out before maturity without a penalty.
• Market-Linked GICs: Provide returns based on the performance of the stock market but safeguard the principal investment.

For a ladder strategy, you’ll want to seek out non-redeemable GICs that offer you higher rates of interest. You can explore market-linked GICs. However, these can sometimes lead to virtually no returns if the stock market struggles and they aren’t the best products.

You don’t need cashable GICs because you’re creating the liquidity with the laddering system. You’ll be sacrificing yield to gain something you are already structuring your portfolio around.

Maximizing your returns with laddering

Investors can benefit immensely from doing a bit of digging and strategic work when it comes to building a GIC ladder.

Navigating interest rate changes

To safeguard against fluctuating interest rates, the GIC ladder strategy involves staggering GIC maturities. By doing so, one is not overly exposed to a low-interest rate environment for all their investments.

However, no matter how tempting it is to simply re-up your maturing capital into a new GIC, ask yourself if there is a chance interest rates could change in the near future that would allow you to maybe capture a bit more interest. 

Sure, it would mess up your laddering strategy a bit because your maturities would be a bit off, but in the event rates go up, you could end up catching a bit more return on your long-term GIC.

Navigate between banks

The question of which institution offers the highest paying GIC is dynamic and can vary based on the term and amount invested. Additionally, online banks tend to provide higher rates of interest. This isn’t always the case, but it’s what I’ve found.

However, don’t feel you need to stick with one bank. If you can capture a higher rate elsewhere, take advantage of it.

Sure, it may not make sense to open up a brand new account at a new institution for 0.1%. But, if you can find a bank that is offering 0.25% or 0.5%, depending on the amount of capital you have invested, it can certainly be worth the move, especially in this day and age where money transfers are nearly instant.

Also people should consider whether they would like some or all of their GICs held in registered or non-registered accounts in regards to taxation of interest income. If people consider GICs in RRSPs or TFSAs, they should also consider how these accounts are insured, as we touch on below here with laddering as well.

Risks with the laddering strategy

When investing in GIC ladders, it’s crucial to consider the inherent risks and constraints associated with them. Although your principle is not at risk (at least in most cases, more on that below), there are inherent risks with fixed-income investments.

Let’s go over them.

Holding uninsured deposits

There is an element of risk if a financial institution were to fail. In Canada, most GICs are protected by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000 for terms of five years or less. 

However, with a laddering strategy, it’s plausible that you have more than this in a single account. In this situation, your deposits over $100,000 would not be insured.

There is a pretty easy way to mitigate this, however. Simply open up accounts at different institutions and maintain less than $100,000 in them.

Inflation and liquidity concerns

The return on GICs can be outpaced by inflation rates, leading to a reduction in purchasing power over time. 

This is particularly relevant for long-term GICs where the fixed interest rate does not account for potential increases in inflation. 

Yes, it seems like we are past the point of sky-high inflation. However, this does not discount the element of inflation risk when it comes to fixed-income investments like GICs. It’s important not to get complacent. 

Additionally, GICs can have liquidity constraints, as funds are often locked in until the GIC matures. Not as simple as just selling Canadian index funds or some shares owned outside of funds. Sure, the laddering strategy adds more liquidity, but 80% of your capital is still tied up for a minimum of a year upon the maturity of one of the GICs.

Maturity and Reinvestment Risks

When considering the maturity dates of GICs, it is important to understand maturity and reinvestment risks. 

Maturity risk reflects the inability to predict the financial landscape at the time a GIC term ends. For example, the interest rates might be lower when it’s time to reinvest, which could affect future returns.

Reinvestment risk is the possibility of having to reinvest at a lower interest rate upon maturity, which is particularly relevant for long-term GICs. 

In addition to this, there is an element of interest rate risk in the fact that you could buy a GIC right now, and rates could increase, resulting in your current money earning sub-optimal returns.

Planning out a GIC ladder

When incorporating Guaranteed Investment Certificates ladders into a financial plan, precise alignment with investment goals and understanding portfolio composition is paramount.

Each individual must consider their unique financial circumstances and, where needed, consult with a professional advisor to ensure their strategy is optimal.

Align your ladder strategy with your financial plan

For those looking to integrate GIC ladders into their financial plan, the alignment with their broader financial objectives is crucial. 

They should consider the term lengths of various GICs and match them with future cash flow needs. 

Utilizing GICs as part of a laddering strategy maximizes accessibility to funds while aiming to benefit from typically higher interest rates offered by longer-term GICs. 

However, the bulk of your money will still be inaccessible, and this needs to fit within your plan.

How much of your portfolio should be in a GIC ladder system?

Deciding the proportion of a portfolio to allocate in GICs often depends on an individual’s risk tolerance, investment horizon, and income needs. There are many options available to Canadians from individual shares in companies such as Canadian bank stocks, or large “baskets” of stocks from many companies across various industries in Canadian ETFs. It makes sense to explore all the different options, learn as much as you can, and then do what you think is best.

The boilerplate advice is to typically incorporate more fixed income into your portfolio as you approach retirement. However, I can’t personally say how much you should have. That is a decision you or your financial planner would have to figure out.

It’s generally advised to diversify and not to rely solely on GICs, as they have different potential returns and risk levels compared to other investments like stocks and bonds.

What are some alternatives to GIC laddering?

When considering alternatives to Guaranteed Investment Certificates (GICs), one must examine the potential returns, liquidity, and risk level they are comfortable with. Many people will compare mutual funds and GICs, or GICs and individual equities.

An increasingly popular option is Bond ETFs. Historically, buying individual bonds has required high levels of capital and accessing the bond market isn’t exactly easy. In addition to this, you have the pricing volatility of a single bond. With bond ETFs, however, they trade much like stocks.

However, the major drawdown of a bond ETF is that your principle is not guaranteed. Price fluctuations of an individual bond can be avoided by simply holding it to maturity and getting your initial capital back. With a bond ETF, however, prices can stay lower for longer as there really is no “maturity” date of the fund.

Another alternative is the use of a High-Interest Savings Account (HISA). While HISAs typically offer lower returns than GICs, the major advantage is access to funds. In addition to this, HISA ETFs present opportunities for higher yields and more liquidity.

• High-Interest Savings Account (HISA):
  • Accessibility: Funds can be withdrawn without penalty.
  • Flexibility: Ideal for emergency funds or short-term savings.
  • Interest Rates: Often competitive, especially with online banks.

Lastly, some might consider dividend-paying stocks as a long-term alternative, particularly for those with a higher risk tolerance.

• Dividend-Paying Stocks:
  • Income: Regular dividend payments provide income.
  • Growth Potential: Stocks can appreciate in value over time.

However, the one important thing to understand about an investment portfolio of dividend stocks is that you have opened yourself up to equity risk. Stocks are volatile; your capital is never guaranteed, nor is the income. So, you need to understand your overall risk tolerance to see if this strategy is for you.