GICs for Retirement: Are They a Wise Investment Choice?

Investors have seen some abnormal fluctuation in their portfolios this year and have wondered if moving to a safer investment such as Guaranteed Investment Certificates (GIC) is a good idea. This has particularly been a popular question among those approaching retirement or in retirement, given the attractive rates that are being offered. In this week’s newsletter, we will find out if GICs are a good idea for your retirement.

Many institutions are offering GICs with rates in the tune of 4% to 5%, depending on the term. For context, we have not seen rates in this ballpark in the last ten years. However, rates are not the only determining factor when looking at financial products– especially when inflation is running higher than usual.

GICs vs Stocks vs Inflation

One key aspect to look at when selecting financial products is how they have performed in relative to inflation. Stocks for example are usually a good long-term inflation hedge, but can look rather weak in the short-term. For example, the Canadian stock market was down around 10% for the first six months of the year while inflation was running high (Heath 2022). But as we know, the longer the time horizon, the better the outcome for stocks.

For retirees, this time horizon is obviously shortened and volatility matters more. There is also the aspect of stress and risk tolerance, that many cannot endure during market turmoil.

Let’s assume our client has a portion of their portfolio allocated to stocks. Does it make sense to completely sell the stocks and move to GICs for safety? By doing this we are permanently accepting a loss and not giving the stocks the opportunity to recover. Although stocks have fallen a lot in value, both the TSX and S&P 500 are only back down to where they were in early 2021. 2021 was a fantastic year for stocks, with the Canadian stock market returning 25% and the American stock market returning 27%. (Heath 2022). If the full portfolio is now in GICS, future return expectations must be lower. This can have an impact on things such as future retirement income or legacy goals for your beneficiaries. As an example, over a 25-year time horizon (typical projected retirement), a 1% higher return on your investments may increase your pre-tax retirement income by about 11%. It could also increase the future value of an inheritance by 27%, ignoring taxes. (Heath 2022).

Adhering to your personal risk tolerance in retirement

Ultimately, it comes down to how comfortable you are with market risk. Finding a balance that you can stick with and that helps you achieves your goals is of utmost importance. Most people however let their emotions take over and want to change their risk appetite as markets change. Most people increase their risk when markets are doing well and decrease it when markets are doing poorly. The problem with that approach is it results in buying high and selling low, which is the opposite of what you should be doing (Heath 2022).

These types of market downturns happen, and the best way to combat them is to stick to your plan. Your portfolio is constructed in a way that is tailored to your long-term plan, not to short-term volatility.

If you want to learn more about GICs and whether they're right for you, get in touch and let's get the conversation started!

Sources:
Heath, J (2022). Is now the time for retirees to sell stocks and buy GICs? Is now the time for retirees to sell stocks and buy GICs? - MoneySense