Michael Callahan, CFP®, CIM®
What is a GIC maturity date?
When a GIC is purchased, the amount invested typically cannot be accessed until the end of the GIC term, for example 1, 3, or 5 years. The end of this term is known as the GIC maturity date. Upon this date, the GIC matures and the amount invested, including interest, is returned to the investor.
Higher interest rates have caused the popularity of Guaranteed Investment Certificates (GICs) to surge in recent years. If you've bought a GIC recently, your GIC may be maturing soon. This presents you with a new opportunity and a decision to make. Do you need the money to pay for a current or upcoming expense? Why are the funds in a guaranteed investment? Do you want to invest the proceeds toward a longer-term goal?
If you're having trouble making a decision, you may think 'I'll just do nothing for now and figure this out later.' But it's important to note that doing nothing also presents a risk. In times of high inflation, cash balances earning no investment return are potentially lowering your future purchasing power.
So, what should you do? The answer is: It depends. There is no one-size-fits-all recommendation, and like so many other decisions, this one is also unique to you and your personal circ*mstances. With that in mind, let's look at five key factors to consider when making your decision.
1. Risk Tolerance
We often think of GICs as low-risk investments, where both the original investment and the rate of return are guaranteed. In terms of volatility and principal protection, GICs are very low risk investments indeed. But the flip side is that you're also likely to receive a relatively low rate of return, and poor tax efficiency. This can contribute to other risks like running out of money in retirement, and not earning a rate of return that keeps pace with inflation. With this broader view of risk, we can see that all investors, even GIC investors, are exposed to risk in some form or another.
Strategy considerations – Ask yourself:
- What poses a greater risk to me, short-term market fluctuations or the prospect of running out of money in retirement?
- Which risks am I willing to accept, and which do I want to protect against?
- Will my investments grow to offset increases in my cost of living over time?
2. Time Horizon
In the context of investing, a time horizon generally refers to the period of time you expect to hold an investment, or until you need that money. Time horizons are often linked to investment goals and strategies, for example to retire in 15 years or buy a house next year. However, time horizons can also be associated with certain types of investment products, such as a 10-year government bond or a 2-year GIC. GICs are generally short-term investments with terms of 5 years or less and are typically more suitable for shorter-term goals and time horizons. The key is to make sure your investments are properly aligned with your goals and investment time horizon.
Strategy considerations – Ask yourself:
- Do I need these funds to cover a current expense?
- Is this money associated with a specific investment goal, such as retirement, education, or a home renovation?
- Do I intend to spend this money in the short, medium, or long term?
3. Current Debts
If your GIC maturity date is soon approaching, it may make sense to use the proceeds to pay down some of your debts, in particular high-interest debt. For example, many credit cards charge interest rates approaching 20% or more, which far exceeds GIC rates currently available. If you're carrying a balance on your credit card or have other forms of high-interest debt, it may be advantageous to use the GIC proceeds to pay down those debts. Pay attention to pre-payment penalties – some loans have fees or penalties for early payments, so be careful to check the terms of your agreement first.
Strategy considerations – Ask yourself:
- What are the interest rates on my current debts such as a personal loan, line of credit, or credit card balance?
- Are there any fees or penalties if I make early payments on my loans?
- Are the rates of interest on my loans higher than the rate I'm earning on my GIC?
4. Tax Efficiency
Tax efficiency is a priority for many investors, and building a tax-efficient investment portfolio can help you keep more of what you earn. When it comes to tax-efficient investing, it's important to remember that different types of investments generate different types of income – interest, dividends, and capital gains. In turn, each type of investment income is subject to different tax treatment. While dividends and capital gains enjoy favorable tax treatment, interest earned from GICs is subject to full income inclusion and taxed accordingly. As such, investments such as GICs have very poor tax efficiency. When choosing your investment products, remember that all investment returns are not treated equally, and it's not just what you earn, but what you keep that matters most.
Strategy considerations – Ask yourself:
- Is tax efficiency important to me?
- Is my investment portfolio structured to help maximize my after-tax investment return?
- Am I at risk of losing Old Age Security or other government benefits if my income is high?
5. Need for Liquidity
Liquidity refers to how easy it is to buy or sell an investment without significantly impacting its price. Liquid investments are easily accessible and can be bought and sold easily and efficiently, whereas assets illiquid assets or assets with low liquidity may be inaccessible, take longer to sell, and may have higher transaction costs. Many traditional investments such as mutual funds and stocks on major exchanges are considered highly liquid, while hedge funds and real estate are often much less liquid. Other than cashable or redeemable GICs, most GICs must be held until maturity, and cannot be sold, redeemed, or transferred from one account to another until they mature.
Strategy considerations – Ask yourself:
- Will I need to access this money in event of an emergency?
- When do I expect to spend this money?
- What is the ultimate intended use of this money?
Bottom Line
Like other investments, GICs are not universally good or bad investments, but rather, may be more appropriate for certain investors at certain times, while being less suitable for others. If you have a GIC maturing soon and wondering what to do next, your Edward Jones advisor can help you assess your overall financial situation, and together you can determine the best path forward for you.
