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Recovering from GIC sticker shock

January 14, 2021 Jonathan Chevreau
Recovering from GIC sticker shock

Nor will matters improve any time soon. The Federal Reserve, Bank of Canada and other central banks have suggested interest rates will stay “lower for longer.” The Fed, in particular, has indicated rates are unlikely to rise for at least three years.

This is classic “financial repression” and unfair to seniors who saved all their lives and don’t wish to take on the full risks of stock investments at this time in their lives. Adrian Mastracci, portfolio manager for Vancouver-based Lycos Asset Management Inc., says GIC rates are “lower than they’ve ever been” and recommends that even retired clients take on a bit more risk by raising their asset allocation to include more stocks.

Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial, says COVID-19 has exacerbated the low interest-rate environment. “Historically, GICs were a great investment for retirees, but today that is much different. You are lucky to get 1% on a 5-year GIC at a major bank, and 2% was the best I could find at smaller financial institutions. If inflation is 2%, or somewhere close to it, your real rate of return is 0% and that is even before taxes are considered.”  

But what if you insist on leaving half your fixed-income allocation in GICs, as our family used to do? At our stage of semi-retirement, we aim for an asset allocation of roughly 50/50, and for the fixed-income portion historically have split it between laddered GICs and bond ETFs, or asset-allocation ETFs with a healthy dose of bonds. 

Short of settling for less on the GIC portion, you may have to go to the trouble of leaving a bank-owned brokerage in favor of independent places like Oaken Financial, which has a 1-year registered GIC paying 1.4% and a 5-year GIC currently paying 2% through Home Trust and Home Equity Bank. (All rates in this article are correct as of Jan. 14, 2021.)

Click on Oaken’s site: “Our competitors’ rates.” There, you’ll see People’s Trust GICs ranging from 1.85% for a 1-year registered GIC to 2.15% for a 5-year; while Accelerate Financial and Implicity Financial both pay 1.7% to 2.1%. Wealth One Bank of Canada pays 2.15% for the 5-year but just 1.5% on the 1-year.  

GICs at the major bank-owned discount brokerages likely pay much less.  RBC Direct Investing does offer 5-year GICs from both Home Equity Bank and Home Trust, but they pay only 1.35% or 1.36% on 5-year GICs, as does Equitable Bank. Next best at RBC is VersaBank (1.26%) and People’s Trust (1.24%). The rest of the 5-year pack pay somewhere between 0.8% and 1.2%. Even if you do find a high-paying GIC, you may be constrained by the fact that any vendor in any one account should be limited to the $100,000 limit guaranteed by the Canada Deposit Insurance Corporation (CDIC).

Moshe Milevsky, professor of finance at York University and chief retirement architect at Guardian Capital, says he and his wife experienced GIC sticker shock when a 1-year bank GIC matured at well under 1%. “She, too, was tempted to move to Oaken, which offered a full half-a-percent more, but I had to remind her about the near-death experience of their parent Home Capital a few years ago.…  Those extra basis points are meant to compensate for the credit risk and the stress of opening up the newspaper one morning and reading that there is a ‘run on the bank’ issuing your GIC.” His wife opted to stay put. 

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