Are GIC rates rising in Canada?
At the beginning of 2022, GIC rates had just started to rise but were still below 3%. The reason they are so high now is worth considering. The Consumer Price Index (CPI) rose 3.9% in 2023 after rising 6.8% in 2022. The Bank of Canada (BoC) has raised interest rates in 2022 to curb spending and inflation. So, while a 4% GIC rate may seem attractive, it represents a true 0% rate of return when inflation is 4%. The BoC predicts inflation should return to its 2% target by 2025. GIC investors can expect GIC rates to drop as well.
GICs vs stocks as hedges of inflation
Stocks are often a good hedge against inflation, but that's not always the case. The S&P/TSX Capped Composite Index fell 6.1% as inflation rose in 2022, while the S&P 500 fell 12.5% (total return of both, S&P 500 in Canadian dollars). Stocks have recovered well in 2023 and so far in 2024 as the central banks appear to have won their battle against inflation. Stocks tend to love falling prices, but now the biggest concern is whether or not a recession is imminent.
Shares are volatile in the short term and sometimes in the medium term but can provide great long term returns for patient investors. The longer your horizon, the less important it is to change. But obviously, a retiree like your husband, Rodeen, has a shorter life span than someone who has been retired for many years. And for some investors, the stress of short-term volatility may not be worth the opportunity to earn high returns.
As a result, asset allocation—how much money to hold in stocks versus bonds, or other asset classes—is becoming more personalized.
If your husband gets out of stocks entirely and into GICs, it may cause temporary stock market losses to become permanent with no ability to recover that principal. So, while there is a risk of more stock market losses by staying invested, as stocks rise more than they fall, and especially after a big fall in value, there is also a risk of selling all at once.
Although shares have fallen sharply in value, their long-term returns have been compelling. The TSX's total return was 7.5% for the 10 years ending December 31, 2023, and the S&P 500, an impressive 14.5% in Canadian dollars.
If your husband moves everything to GICs, Rodeen, that will reduce his long-term expectation of returning his portfolio. This may reduce your retirement income or potential future inheritance to your beneficiaries. As an example, over a 25-year period, a high 1% return on your investments could increase your pre-tax retirement income by nearly 11%. It can also increase the future value of the estate by 27%, ignoring taxes.
Prices are not the only thing that matters
It's important to consider how much of your husband's portfolio is being taken out for use each year, Rodeen.
Source link
