By: Devon Ethier, , MBA, CFP®, CIM®
As Guaranteed Investment Certificate (GIC) rates in Canada are expected to decline, retirees and those nearing retirement face the challenge of maintaining a stable and safe retirement income. Here are some strategies Canadians can consider to navigate this financial landscape effectively:
Understanding GICs
GICs are low-risk investment products that guarantee the return of the principal along with a fixed interest rate if held to maturity. They have been popular among conservative investors, especially when interest rates were higher. However, with rates expected to decrease, it's crucial for retirees to reassess their investment strategies.
Diversifying Investment Portfolios
Laddering GICs: One strategy is to ladder GICs, which involves purchasing multiple GICs with different maturity dates. This approach allows investors to benefit from potentially higher rates in the future while maintaining liquidity. By having GICs mature at different times, investors can reinvest at prevailing rates, potentially capturing higher returns if rates rise.
Equity-Linked GICs: These products offer the security of a GIC with the potential for higher returns linked to equity market performance. While the principal is protected, returns can vary based on market conditions, providing an opportunity for growth without the risk of losing the initial investment.
Diversifying with Dividend Stocks: Including dividend-paying stocks in a portfolio can provide a steady income stream. Dividend stocks, especially those from stable sectors like utilities and telecommunications, can offer returns comparable to GICs but with the added benefit of capital appreciation and favorable tax treatment on dividends.
Tax-Sheltered Accounts
Using TFSAs and RRSPs: Placing GICs within a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) can provide tax advantages. Interest earned in these accounts is not subject to taxes, allowing for more efficient growth of retirement savings. Withdrawals from a TFSA are tax-free, while RRSP withdrawals are taxed at the marginal rate, making strategic planning essential.
Registered Retirement Income Funds (RRIFs): For retirees, converting an RRSP to a RRIF can provide a structured withdrawal plan. Including GICs in a RRIF can ensure a predictable income stream while benefiting from continued tax deferral on the remaining balance.
Exploring Alternative Investments
High-Interest Savings Accounts (HISAs): These accounts can offer competitive interest rates with the flexibility of accessing funds without penalty. They can serve as a complement to GICs, providing liquidity while still earning interest.
Bond Funds and ETFs: While bond markets have been volatile, they remain a staple in many retirement portfolios. Bond exchange-traded funds (ETFs) can offer diversification and liquidity, potentially offsetting lower returns from GICs.
Seeking Professional Advice
Consulting with a financial advisor can help tailor a retirement strategy that aligns with individual goals and risk tolerance. Advisors can provide insights into market trends and recommend a mix of investment products that balance security and growth potential.
In conclusion, while declining GIC rates pose a challenge, Canadians can still create a safe and sustainable retirement income by diversifying their portfolios, utilizing tax-sheltered accounts, and exploring alternative investment options. By staying informed and proactive, retirees can navigate the changing financial landscape with confidence.
Disclosure
This information has been prepared by Devon Ethier, MBA, CFP®, CIM® who is a Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
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