GIC laddering

GIC laddering is a strategy to maximize interest earned while making some of your money available every year.

5-year GICs (Guaranteed Investment Certificates or “term deposits”) typically offer the highest interest rates but lock your money in for a long period of time. 1-year GICs typically offer the lowest interest rates but your money is available again in 1 year.

As an example, if you were to split your money in 5 and purchase a 5-year GIC with 1/5 of your money every year, then you’ll always have 1 GIC maturing every year, but all of your money is always in some form of 5-year GIC. If you need some money, you’ll have it available, and if you don’t, you can just re-invest the money into rolling 5-year GICs. This has the added advantage of smoothing our your interest rate risk — you don’t worry about timing the rates because you’re always investing in what is likely the highest rate at the time.

One way to set up a GIC ladder at the very beginning is to split your money into a 1-year, 2-year, 3-year, 4-year, and 5-year GIC. When that first 1-year GIC matures, you re-invest it in a 5-year GIC. After the 4-year GIC has matured and you’ve re-invested it into a 5-year GIC, all of your money is in some form of 5-year GIC, with a GIC maturing every year.

Of course, this is a strategy and not a special type of account, so you can split your money any way you want and in any length of terms.

For a more in-depth explanation, see the article Savings account investment strategy: what are laddered term deposits / GICs?

A similar but different strategy when buying a GIC is to buy multiple GICs for the same term, essentially splitting your investment. This is applicable to cashable and non-cashable GICs, because it reduces the penalty you face for withdrawing your money at any time. For example, instead of buying a single 5-year GIC for $100,000, you can purchase 4 x $25,000 5-year GICs. If you need some (rather than all) of your money before the term is up, you can withdraw the money from just 1 or some of your GICs.