How GIC Laddering Works

It’s not hard to see why so many investors choose to purchase guaranteed investment certificates (GICs). They’re a low-risk investment, can be used to meet a range of financial goals, and there are lots of different terms to choose from. For example, investors can choose a short-term GIC of a year or less or a long-term GIC of up to ten years. 

Though locking your money in for longer usually comes with better interest rates, this option isn’t feasible for everyone. If you’re looking to make the most of your GIC investment but want greater flexibility than a long-term GIC offers, consider GIC laddering. Keep reading to learn more about this effective investment strategy.

What Is GIC Laddering?

GIC laddering is an investment strategy that allows investors to maximize the returns on their GIC investments without locking in their money for long periods. The strategy is relatively simple and goes like this: You begin by dividing the total amount you want to invest by five. 

From there, take those five smaller amounts and invest them in five separate GICs, each with different term lengths. The five GICs you invest in should have the following terms: 1-year, 2-year, 3-year, 4-year, and 5-year. 

This way, you’ll have a GIC maturing every year over five years, freeing up your money annually. Whenever one of your GICs matures, you can choose to use it how you wish, whether that means withdrawing and spending it or withdrawing and reinvesting it.

The Benefits Of GIC Laddering

Laddering your GIC investments offers plenty of benefits, from maximizing your returns to greater flexibility. A few other pros of GIC laddering are listed below.

• You can maximize the returns on your investments: By investing your money in multiple GICs of different terms, you create the potential to earn more money than you would if you only invested in short-term GICs with lower interest rates.
• You can benefit from better interest rates: Since one of your GIC investments will mature each year, you can research the GICs with the best terms and choose to reinvest your money in a GIC with a higher interest rate.
• You will have access to one-fifth of your investment every year: GIC laddering means a new investment matures annually. This makes laddering a relatively liquid investment strategy, giving investors the flexibility they require. For example, if an unplanned expense comes up, you can use the money from your matured GIC.
• GIC laddering is low risk: GICs are some of the lowest-risk investments out there. If you choose a fixed-rate GIC, you’re guaranteed a return on your investment. Even if your rate of return is low, you will still walk away with something. Therefore, GIC laddering can be a great option for investors looking for a stable investment.

The Potential Risks Of GIC Laddering

Though the benefits generally outweigh the drawbacks of GIC laddering, there are a couple of potential risks to be aware of:

• Your returns may not keep pace with inflation: Depending on the state of the economy and the terms of the GICs you choose, there is a chance that your investment may not keep pace with inflation.
• Variable-rate GICs are riskier: Variable-rate GICs are riskier than fixed-rate GICs as your return is based on the performance of the stock market. Therefore, if you buy variable-rate GICs using the GIC laddering strategy, you may not come out ahead.

How To Construct A GIC Ladder?

In order to build a GIC ladder, there are some steps involved that need consistent expertise. Check them out here:

Step 1: Categorize your savings and purchase five GICs

Let’s consider that you own $25,000 for investing in GIC. Instead of investing the entire money into a five-year plan of GIC, you choose to construct a GIC ladder. Here, you need to invest $5,000 into each GIC having various terms. You might select a one-year GIC, a two-year plan of GIC, or ones lasting for three, four, or five years. 

For determining the perks of a GIC ladder, think about the following rates your new sets of GIC might possess-

• For one year= 4.50%
• For two years= 4.75%
• For three years= 5.00%
• For four years= 5.10%
• For five years= 5.20%

Step 2: Reinvest your GICs once they mature

Your first GIC might mature within the first year. Considering this instance, your investment of $5,000 will earn somewhere around $5,237.50 on maturity, with an addition of 4.75%. 

In this situation, there are chances of your reinvestment of $5,237.50 into a GIC plan of five years. This might knock out the 1-year term ringing from your ladder and boost the average return rate. 

Comprehending the rates in this instance, your complete interest will now sum up to 25.25%. You have to divide the entire rate by your investment of five years as well as the second-year average return will now sum up to 5.05%.

Now, you are ahead by 0.14% of where you were if you simply invest all your savings in a single year GIC. Or even if you roll it over the second time. 

Step 3: Continue repeating the process

As every GIC continues to mature, you get the option to reinvest your funds into a five-year GIC. Since you stumbled upon the initial terms, a single GIC will keep maturing each year. 

Let’s consider that the interest rates remain constant for five years straight. This indicates that at the start of year six, all your investments will reside in the five-year term GIC with a rate of 5.2%. Laddering is a long-term strategy that will give you higher returns if you keep investing longer. 

Conclusion

When it comes to smart investment options, nothing beats a GIC ladder, provided you know the right steps. A laddered maturity plan might be the most effective way to assist you in boosting GIC returns along with maintaining a safe portfolio. 

So, this was all about it. Thank you for reading!

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