# On the best way to use GIC Ladders



## JackieK (May 3, 2014)

Let's say I have $300K in my RRSP, almost all in cash after selling equities. I want to take out $15K yearly to be transferred to my taxable account (minus tax naturally), what would be the best way to do so?

Could I only use 5-year ladder GICs in that RRSP account?
Would I need four 5-year ladders to make this happens with $20K in each?
What other investment strategies should I use instead?

BTW, as you see this is probably a newbie question for you guys. I've been trading equities for about 20 years, and I've never really got involved with fixed income, but now that I'm retired, it's another ball game!


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## like_to_retire (Oct 9, 2016)

JackieK said:


> Could I only use 5-year ladder GICs in that RRSP account?


Yes. As a GIC matures each year, you hold back the cash amount you want to remove from the account, and then re-purchase a new GIC on the rung with the remainder.



JackieK said:


> Would I need four 5-year ladders to make this happens with $20K in each?


I'm thinking you may not understand what a 5 year ladder actually is?

ltr


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## james4beach (Nov 15, 2012)

JackieK yes, this should be done by only purchasing 5 year GICs, spaced appropriately (some of us space them 6 months part), but once the ladder is up and running, everything in it should be a 5 year GIC. That's because you get the highest yield on 5 year terms. And it generally keeps up with inflation... currently actually beats inflation.

RBC's page on GIC laddering approach

Let's say the 300K is fully invested in 5 year GICs with 6 months between each maturity -- note that this will take a while to get fully up and running. That would be 10 GICs x 30K each. Note the beauty of this approach. Every 6 months, you get your hands on a full 30K cash! You can easily take out 15K at that point. Keep reinvesting the remaining balances, buying a new 5 year GIC each time (getting you the highest yield).

I suggest creating a spreadsheet to track the ladder. First you'd buy a 1 year, 2 year, 3 year, etc. Then 6 months from now you'd do the same. At that point you'll have 300K invested across 5 years, at 6 months intervals.


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## Eclectic12 (Oct 20, 2010)

JackieK said:


> Let's say I have $300K in my RRSP, almost all in cash after selling equities. I want to take out $15K yearly to be transferred to my taxable account (minus tax naturally) ...


Hopefully you already know this ... but the RRSP withdrawal is going to have a withholding tax on it. This may or may not be enough to cover the final tax when the annual tax return is filed, around April the following year. 

GICs are typically locked in (or pay a lower rate for cashable ones) so hopefully there are other sources of income to pay the difference, if the withholding tax was not enough. If it was too much, you may end up with a bit extra cash to invest or spend.
https://www.taxtips.ca/rrsp/withholdingtax.htm




like_to_retire said:


> JackieK said:
> 
> 
> > ... , what would be the best way to do so?
> ...


Does not sound like the five year GIC ladder is understood.

The aim of the five year GIC ladder use the five year GIC to earn a high rate. If everything was in one GIC, one would have to wait five years to access the cash and any interest rate increases would be unavailable. Splitting the total into five equal amounts means that one five year GIC will mature each year, allowing one to choose what to re-invest as well as take advantage of higher interest rates. 
https://www.ratehub.ca/gics/gic-laddering

Some here who want more options for access to cash will setup two ladders with one ladder maturing at say March and one ladder maturing in Sept. Smaller amounts are in each slice but one will have two opportunities during each year to access cash.




JackieK said:


> ... What other investment strategies should I use instead?


Some will buy bonds or bond ETFs ... but these have their own learning so I'd stick with the simple five year GIC ladder for now. You can add other FI investments into the mix after you have learned about them.


Cheers


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## JackieK (May 3, 2014)

You're correct! I don't quite know how to work with a 5-year GIC ladder! (Hey, not my fault, I use to never deal with fixed income!)

But James4Beach may have given me some clues... let's move to his post....

EDIT: Gimme a few minutes, so I can better rephrase my question :subdued:


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... I suggest creating a spreadsheet to track the ladder. First you'd buy a 1 year, 2 year, 3 year, etc. Then 6 months from now you'd do the same. At that point you'll have 300K invested across 5 years, at 6 months intervals.


True ... though as the non-five year GICs mature, the aim is to replace them so that all GICs are five year ones to be obtaining the better five year GIC rates. To my way of thinking, one is partially there at the six month mark instead of all the way there.


Cheers


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## JackieK (May 3, 2014)

OK, here's the idea.

Every year, I want to withdraw and transfer $12K "net" from my RRSP to my taxable account. Roughly speaking, 15K minus withholding tax comes to just about 12K. That's what I need in my taxable account (I have other sources of income to compensate.)

Now, if I have $300K in the RRSP account, I certainly don't want to have a 5-year ladder of $60K each coming due each year! I am trying to get 15K, not 60K. That's why I said that maybe I need more than one ladder.

Sorry, but I'm still very confused.... don't laugh please, I"m in the learning process :very_drunk:


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## GreatLaker (Mar 23, 2014)

JackieK said:


> OK, here's the idea.
> 
> Every year, I want to withdraw and transfer $12K "net" from my RRSP to my taxable account. Roughly speaking, 15K minus withholding tax comes to just about 12K. That's what I need in my taxable account (I have other sources of income to compensate.)
> 
> ...


Here are a couple of good resources on GIC ladders. In general I find that finiki.org is one of the best Canadian investing resources.
https://www.finiki.org/wiki/Fixed_income_ladder
https://www.finiki.org/wiki/Portfolio_design_and_construction#The_GIC_or_bond_ladder

If a $60k GIC matures and you need $15k cash then you take that out and buy a new GIC with the cash that's left ($45k plus interest paid on the maturing GIC).

Note that you will be taking out 5% of your portfolio every year, so with current interest you will eventually deplete your portfolio. If you are not totally risk averse you may want to consider some equities in your portfolio.


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## fireseeker (Jul 24, 2017)

JackieK said:


> Now, if I have $300K in the RRSP account, I certainly don't want to have a 5-year ladder of $60K each coming due each year! I am trying to get 15K, not 60K. That's why I said that maybe I need more than one ladder.


Yes, you do want $60K coming due each year. You take out $15K and, as LTR said upthread, you reinvest the remaining $45K in a new 5-year GIC.
This all assumes you want all this money to be FI.

Edit: GreatLaker said it first ...


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## like_to_retire (Oct 9, 2016)

JackieK said:


> Sorry, but I'm still very confused.... don't laugh please, I"m in the learning process :very_drunk:


A 5 year GIC ladder consists of 5 GICs that have maturity dates set at 1, 2, 3, 4, 5 years.

Simple concept, but to accomplish this you must start out on day one by purchasing 5 GICs with terms of 1, 2, 3, 4, 5 years.

After 1 year, the first GIC comes due and you buy a 5 year GIC. 
After 2 years, the second GIC comes due and you buy a 5 year GIC.
After 3 years, the third GIC comes due and you buy a 5 year GIC.
After 4 years, the fourth GIC comes due and you buy a 5 year GIC.

That's it, after 4 years you have 5 GIC's at a 5 year interest rate that come due every year. Rinse and repeat forever.

Now, if you need cash withdrawn from a ladder, as a GIC comes due through the year, pull that cash out and buy a new 5 year GIC. Done.

ltr


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## JackieK (May 3, 2014)

So, from 300K, you have a 60K yearly GIC that matures?

I would take out 15K from it, and reinvest in a 5-year GIC 45K?

Is that the way it should be done?

EDIT: How long will 300K last?


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## like_to_retire (Oct 9, 2016)

JackieK said:


> So, from 300K, you have a 60K yearly GIC that matures?
> 
> I would take out 15K from it, and reinvest in a 5-year GIC 45K?
> 
> ...


Yep, with a $300K ladder you would have $60K rungs, one coming due every year. If you required $15K per year you would re-invest $45K into each rung at maturity, and so on.

I'll let you do the math on its longevity. A good exercise to further understand how it all works.

ltr


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## DenisD (Apr 19, 2009)

If your RSP is at a discount broker, you would normally take the best rate available for each GIC. But, at 60k/GIC, each GIC should be with a different financial institution. This way, they're all insured by CDIC.


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## gardner (Feb 13, 2014)

JackieK said:


> How long will 300K last?


With interest rates of 3.5%, about 35 years. With a more pessimistic 2.5% average rate, the money would run out in 28 years.

As J4B mentioned, I also like to run 10 GICs spaced at 6 months. For a larger amount, I might go quarterly. It's not too much hassle for me running a 10-way CA$ ladder and another 10-way US$ ladder both spaced at around 6 months. Most institutions have helpful 18-month and 6-month terms to help get things rolling. You can put 30K into 1, 2, 3, 4, and 5 year terms, then 30K into 18 month and the rest of the 120K into a 6-month term. Then in 6-months time, fill out the other legs of the ladder.


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## GreatLaker (Mar 23, 2014)

JackieK you did not say the purpose of these funds. If it is for living expenses you should also consider the impact of inflation. At 2% inflation, after 30 years the money would lose about 45% of its purchasing power. So in 30 years, $15,000 will be equivalent to about $8200 today.

If you have other sources of inflation indexed income like CPP, OAS or an indexed pension that would partially mitigate the effect of inflation.


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## agent99 (Sep 11, 2013)

gardner said:


> With interest rates of 3.5%, about 35 years. With a more pessimistic 2.5% average rate, the money would run out in 28 years.


If Jackie has been investing for 20 years and now has $300k in RRSP, we can only assume he/she is not that young and may even be near or already retired. If so, at some point, presumably well within the 35 or 28 years, he/she will have to convert to a RRIF (at age 72). At that point the amount that has to be withdrawn is dictated by the RRIF rules. 5.4% at 72 and increasing each year after that. 

PS: It might even be worthwhile converting at least in part, to a RRIF earlier and getting the pension credit (if Jackie will not already have pension income)


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## JackieK (May 3, 2014)

agent99 said:


> ... at some point, presumably well within the 35 or 28 years, he/she will have to convert to a RRIF (at age 72). At that point the amount that has to be withdrawn is dictated by the RRIF rules. 5.4% at 72 and increasing each year after that.


I'm 65 and already retired with my wife. No company pension. Just what we have put aside for our "old" days, right now in fact! We both have CPP and OAS.

That's a good point about the RRIF. So I may have to take out more than 15K to meet the required withdrawal.



> PS: It might even be worthwhile converting at least in part, to a RRIF earlier and getting the pension credit (if Jackie will not already have pension income)


I don't quite understand that one. What are the benefits of converting part of my RRSP into a RRIF right now? Don't we get "pension credit" as soon as we reach the 65 yr mark? Or maybe we get another kind of credit when we have to withdraw from RRIF. Where can I get more info on?


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## JackieK (May 3, 2014)

One more point to consider: Should I stick with GICs only, since I can get better rates with corporate bonds? 

On BMOIL (BMO Investorline), today's best GIC rates are:
1yr - 2.63%
2 - 2.82$
3 - 2.91%
4 - 2.98%
5 - 3.11%

If I go with individual bonds, I can get a Bell coupon Dec25 (priced at 79.33 per $100) with an annual yield of 3.44%

That's a bit better than the GIC 5-yr at 3.11%. So why not choose the corporate one? I don't think Bell will go belly up (pun intended!) within the next 5 years.

Geez, there's so much I don't understand with bonds :distrust:


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## like_to_retire (Oct 9, 2016)

JackieK said:


> I don't quite understand that one. What are the benefits of converting part of my RRSP into a RRIF right now? Don't we get "pension credit" as soon as we reach the 65 yr mark? Or maybe we get another kind of credit when we have to withdraw from RRIF. Where can I get more info on?


TaxTips site. Excellent site by the way.

CRA

ltr


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## james4beach (Nov 15, 2012)

JackieK said:


> One more point to consider: Should I stick with GICs only, since I can get better rates with corporate bonds? . . . If I go with individual bonds, I can get a Bell coupon Dec25 (priced at 79.33 per $100) with an annual yield of 3.44%


These two things are very different. The GIC is a guaranteed contract which is also government backed, if covered under CDIC (strongly recommended). There is virtually no risk at all. A corporate bond on the other hand has default risk, and you really would have to buy a very large number of corporate bonds to spread the risk around sufficiently.

A bond ETF can do this for you, to diversify corporate bonds. iShares XSH is a good one. However, you will find that the average yield of XSH's diversified portfolio of many corporate bonds works out to around 3.0% which is the same yield as the GIC.

One thing you can do is mix XSH together with 5 year GICs. They will both have similar yields, but XSH gives you some liquidity.


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## Retiredguy (Jul 24, 2013)

like_to_retire said:


> TaxTips site. Excellent site by the way.
> 
> CRA
> 
> ltr


Also

https://retirehappy.ca/are-you-taking-advantage-of-the-pension/

Depending on your RRSP holdings you may be able to set one up for yourself and one for your wife and thereby you would each get the credit. It explains in the info but FYI OAS and CPP do not qualify for the credit but setting up a RRIF does. From what I've read here about your situation, make it a priority, there is definitely some savings here for you.


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## agent99 (Sep 11, 2013)

JackieK said:


> I'm 65 and already retired with my wife. No company pension. Just what we have put aside for our "old" days, right now in fact! We both have CPP and OAS.
> 
> That's a good point about the RRIF. So I may have to take out more than 15K to meet the required withdrawal.
> 
> ...


Unless you have a company pension plan, only pension you will get is CPP. That is not considered pension income. However, if you draw from a RRIF, that is considered pension income. Drawing from RRSP is not considered pension income. So you could convert part of your RRSP so that you could withdraw at least $2000 pa. But read the link from taxtips that ltr posted, especially this part: https://www.taxtips.ca/filing/pensiontaxcredit/createpensionincome.htm

By the way, I do not have a GIC ladder. I have a fixed income ladder! It has a mix of GICs and individual corporate bonds. These are chosen so about two mature each year. Others may not agree, but I like the certainty of this and stay away from bond ETFs that can lose your capital, at least in the short term. So long as you buy bonds from safe companies like Bell and quite a number of others, you can sometimes do better than you can with GICs. In particular for the 1,2,3 yrs that you will need to start such a ladder. I even throw a little into some higher yielding (higher risk) bonds like Ford and GM at present. But only an amount that I can stand to lose (which is very unlikely)


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## Gruff403 (Jan 30, 2019)

First post so here are my two cents.

Look at a Cash Wedge concept where some is in GIC that mature like a ladder but some is in a solid equity that has growth potential. If you have 20 years of trading equities you must have learned something. Perhaps put a small portion into a solid dividend stock like Canadian banks. Your have the risk of the stock value dropping but that is only a problem if you sell and the dividends will beat inflation risk.
You don't have to covert all your RRSP to RRIF to take advantage of the tax credit.
The taxtips site is amazing. Lots of good calculators.
Look at topping up to the bottom of the next tax bracket strategy and move money into your TFSA if room before moving into your non registered account.
Use a tax program to play with different strategies.
Read the Retirement Income Blueprint by Daryl Diamond - he has some good insights.


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## OnlyMyOpinion (Sep 1, 2013)

Gruff403 said:


> First post so here are my two cents...


All good points Gruff. Welcome to CMF!


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