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There has been some discussion on several Canadian blogs regarding GICs. One point that has been discussed is whether it would make sense to invest 100% of your RRSP and TFSA in GIC's. I believe that over the longer term indexfunds or ETFs is the way to go but I am no expert. I would like some opinions on the following hypothetical senerio please.

Say you were in your mid 30's and were hoping to retire at 60. You've got about 25 yrs to build a nest egg.
Currently you have approx $200,000 invested in RRSP & TFSA. Half is invested in GIC's the other half in TD e-series funds. No mortgage, no debt. You plan on maxing out RRSP and TFSA for the next 25 yrs ($22,000 for RSP and $5000 each for husband / wife TFSA). Two young kids both with e-series RESP accounts. You live well within your means. In fact you're quite frugal.

If you invest everything you have now along with $32,000 per year for the next 25 yrs in a 5 year ladder GIC, even at 4% return which is the low point in resent years, you'd end up with just shy of $2,000,000 at age 60 plus CPP (providing it is still around) for you and your wife.

Obviously inflation hasn't been taken into account but on the same token the 4% rate is on the low end of historical rates.

Why bother with the ups and downs of the market?
 

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Because for the same level of saving invested in a balanced portfolio, you would have 4 or 5 million at retirement. A 2% real return is pretty abysmal.
 

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I am not really a proponent of the all-GIC/RRB/TIPS style of investing, but - and at the risk of repeating myself - there are smart people who argue in favour of this approach.

Professor Zvi Bodie is the leading advocate of this approach.

I highly recommend reading his "Worry-Free Investing" to understand his arguments.

Editing to say that Zvi's website includes a lot of videos worth watching, too.
 

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David Tahriar is another.
His latest book Enough Bull has this central theme.
How to get out of the stock market madness and use only GICs to save for retirement.
He also focuses on other optimization strategies like income splitting etc.
 

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Obviously inflation hasn't been taken into account but on the same token the 4% rate is on the low end of historical rates.

Why bother with the ups and downs of the market?
Because an all-bond portfolio comes with its own set of risks. Bond returns over very long time-frames can be expected to be about 2 percentage points above inflation. But this is no guarantee. Real returns from bonds can also be negative over long periods of time.

For long-term investors, volatility may be elephant in the room. It is visible, appears like a big threat and if not handled properly can easily crush a portfolio. But inflation is much worse -- it's like invisible termites, forever damaging your capital and investment returns. A couple in their mid-thirties might want their portfolio to last 60 years or so. It makes a lot of sense for them to keep the bulk of their financial assets in stocks because stocks represent a ownership interest in a stream of earnings. Corporate earnings can be reasonably expected to keep up with inflation over the long-term.

That's why investors should hold a mix of stocks and bonds based on their ability and capacity to handle risk. If you ask me, investors *should* hold some stocks. Whether they *could* handle it is a question only they can answer.
 

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Whats a GIC? LOL

Just kidding.

Xander 'Why bother with the ups and downs of the market?' Don't bother. With a 25 year time horizon you really shouldn't worry if the market has an up week or not.

CC 'That's why investors should hold a mix of stocks and bonds based on their ability and capacity to handle risk.' Agreed.

The more you understand the markets the less you will panic with a down day, or plug all of your free cash into a stock that has risen the past week or two.

Not sure where you came up with the 32K amount to contribute every year. Is that what you normally invest? 22K in RRSP and 5K each in TFSA for you and spouse?

There truly is no right formula or answer for everyone who posts this question or a form of it online.

When you have to begin to cash out your RRSP the GIC's aren't the most tax efficient investment. (edit-assuming you intend to keep them as GIC's after you begin to collapse the RRSP account)
 

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When you have to begin to cash out your RRSP the GIC's aren't the most tax efficient investment.
All withdrawals from an RRSP/RRIF are taxed as ordinary income in the year of withdrawal, no matter the source of the funds. Cash, GICs, individual stocks, mutual funds, ETFs, whatever - they are all taxed identically.
 

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What you need to do is figure out how much you need to meet the standard of living you want in retirement with adequate protection against inflation. If the return of GICs will get you where in need to be then I would say there is no reason to take on additional risk.
On average the return of 5 year GICs has been about 7% since 1950, 3.2% higher then inflation. Investing in the DAX long bond index would get you only a slightly better 7.4% with more risk and volatility. These number are scewed higher then I think they will be in the future becasue the high rates we saw in the 80's. I do not think will will see a 20% prime rate again so 4-5% is a good estimate going forward. If GICs are not going to get you enough of a return but you want to limit risk a portfolio consisting of about 80% bonds and 20% equities would have given a better return then GICs by a bit better then 1% with much less volatility then a 100% bond portfolio. A written Financial Plan can really help answer these type of questions.
Ryan Rohloff FMA, FCSI
Atlas Financial Planning
 

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I wouldn't plan to work to 60 and would do some real investing instead of just parking the savings. There are lots of ways to reduce volatility even in a real investment portfolio.
 
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