Guaranteed Investment Certificates (GIC) provide a guaranteed form of income, provided you lend your money for a set amount of time. In return for the ability to use your money to make money, the financial institution pays you a small yield.
However, GICs are a little inflexible in many ways. Since you agree to keep your money in the bank for a set period of time, you face sometimes-steep penalties if you withdraw your money before the term is up. Another issue is the fact that you are stuck with your rate. If you put your money in a five-year GIC, and yields rise after two years, you are out of luck. For three years, you miss out on the gains from higher yields.
This makes GICs, when used singly, rather inconvenient for regular income or for use as an emergency fund. In order to make them more useful to you, it makes sense to build a GIC ladder.
GIC Ladder: Flexibility, Access, and Yield
If you do want to take advantage of GICs, there is a way to increase the flexibility of when you can withdraw your money, as well as decrease the risk of investing at a low interest rate.
GIC laddering involves splitting up your investment into separate terms. Then you choose different maturities so that your GICs come to term in an orderly manner. If you have $5,000 to invest, you could purchase five separate $1,000 GICs, each maturing one year later. 
So in this example, you would purchase:
- A 1 year GIC for $1,000
- A 2 year GIC for $1,000
- A 3 year GIC for $1,000
- A 4 year GIC for $1,000
- A 5 year GIC for $1,000
Having your GICs laddered like this gives you $1,000 back each year, plus the interest it earned, as opposed to having the entire $5,000 locked in for the full 5 years.
This provides you an annual opportunity to decide what you’d like to do with the money. You might choose to turn it over into another GIC if interest rates are good. In this case, you continue the ladder by purchasing a five-year GIC each following year, since you’ll always have GICs maturing every year for the next 4 years.
With this method, you keep the GIC ladder going, and you have the advantage of always getting a better yield, since you are putting your money into a longer-term GIC. Plus, each year, as another GIC matures, you have the option of taking advantage of possibly-higher yields and locking them in.
On the other hand, if interest rates are low that year, you might decide to invest your matured GIC in stocks or mutual funds if their prices look reasonable. This is the flexibility that GIC laddering provides.
Build a GIC Ladder for Emergencies
You don’t have to confine yourself to using GIC laddering just for trying to chase yield. It’s also possible to create a shorter-term GIC ladder designed to help you in the event of an emergency. Instead of a five-year GIC ladder, you can reduce it to smaller intervals. It’s possible to set up a GIC ladder so that a GIC matures every six months, or every three months. That way, if you need the money for emergency purposes, it’s more accessible.
Consider your needs, and then determine whether or not a GIC ladder might work for you.
How to Build a GIC Ladder,
What banks offer GICs?
Joel, I’m sure every bank has some form of GIC. Here are some to get you started:
ING Direct
President’s Choice
RBC
What is the interest rate if you would put your money directly into a savings accounts verses putting it into a GIC account? Can you compare the two?
For example; if I put 100,000 into a savings account verses 100,000 into a GIC account?
This is a fantastic strategy if guaranteed investment certificates are high. If they are low, perhaps you want a shorter-term GIC with the expectation that rates will climb and thus you can benefit from the roll-over. Also, you can just get an adjustable rate GIC if rates are low.
I am still a dozen or so years out from retirement and I will start moving out of riskier stocks and mutual funds in to self-directed GIC ladders about 5 years before retirement.
TD is offering a 5 year GIC Stepper that offers 1% in year 1 up to 1.75% in year 4 and finally 4% in year 5.
Doing it yourself is the better way to go.
What would the effective 5 year rate be? Secondly, what would happen if you needed cash in year 3? Me thinks laddering is the more predictable.
I do this a lot for conservative clients. An additional option is the principal plus strategy to provide them with a slight potential for growth. For example for a portfolio of $100 000 I calculate based on the yield of the GIC ladder what is needed to invest to have $100 000 after the 5 years. So if that works out to say $90 000 we take the additional $10 000 and put that into a portfolio. At the end of the 5 years the client knows they will have the $100000 and whatever gains/losses on the $10 000. Much less anxiety for those that want some growth/income but a scared to venture to far away from GICs.