Guaranteed investment certificates (GICs), like other fixed-term investments, come with interest rate risk. If you have $20,000 to invest in GICs, you must choose whether to lock that money away for one year, two years, five years or longer. Predicting the direction of interest rates over that period is difficult, and choosing a single term can leave you exposed if rates move against you.
For example, you might opt for a longer-term GIC because rates are higher today, only to see rates rise further and miss out on better returns. Alternatively, you might be worried that current rates are strong but will fall by the time a long-term GIC matures, leaving you to reinvest at much lower yields. Rather than try to forecast rate movements, many investors use a straightforward strategy to spread risk and increase flexibility: GIC laddering.
Setting up a GIC ladder
GIC laddering means staggering the maturity dates of a series of GICs so that a portion of your capital matures at regular intervals. Picture a physical ladder: each rung represents a different maturity. By spacing maturities across one, two, three, four and five years, you create a steady cadence of maturing investments.
Suppose you have $10,000 to invest. Instead of putting the entire amount into a single five-year GIC, you could divide it into smaller GICs—$2,000 in a one-year GIC, $2,000 in a two-year GIC, $2,000 in a three-year GIC, and so on. Each year one of those GICs will mature and return principal plus interest, giving you options: spend the funds, hold them in cash, or reinvest in new GICs at current rates.
There are many ways to construct a ladder depending on your objectives. You can choose equal amounts across terms, use shorter or longer maximum maturities, or ladder within registered accounts such as an RRSP or TFSA to defer or shelter interest income from immediate taxation. The core idea is to avoid concentrating all your money in one term and to create regular opportunities to renegotiate your rate exposure.
Benefits of GIC laddering
Laddering GICs provides several practical benefits:
- Reduce guesswork: You don’t have to predict which term will offer the best return, because you’ll have funds spread across multiple maturities.
- Capture rising rates: With a portion of your portfolio maturing each year, you can take advantage of upward movements in interest rates as they occur. If rates fall, only some of your money will be exposed to the lower reinvestment rates.
- Improve liquidity and flexibility: Regular maturities give you access to a portion of your capital and interest without breaking a long-term GIC early and incurring penalties. That makes the ladder more adaptable to unexpected expenses or changing financial goals.
When each GIC matures, you can choose to reinvest the proceeds into a new GIC, continue rolling them into the ladder, or allocate the funds to other investments. Reinvesting interest payments and matured principal can increase your returns over time through compound interest, since future earnings will be calculated on a larger balance.
Keep in mind that unless your GICs are held in a registered account such as a registered retirement savings plan (RRSP) or tax-free savings account (TFSA), interest income is taxable in the year it is earned. That tax treatment can affect the after-tax returns of a ladder, so consider account type when building your strategy.
Other practical considerations include the minimum deposit amounts required by issuers, early redemption penalties, the issuer’s creditworthiness, and whether you prefer redeemable or non-redeemable GICs. A ladder can be tailored to accommodate these constraints while still delivering the benefits of regular maturities.
GIC laddering is a conservative, disciplined approach to managing interest rate risk and liquidity. It reduces reliance on timing the market and offers a predictable schedule of maturing investments that can be adjusted to meet changing needs.
Read more about GICs as a good investment:
- How GIC interest rates work
- Is now the time for retirees to sell stocks and buy GICs?
- Annuity vs. GIC: What makes sense for retiring?
- How to invest as a teenager in Canada