High Interest Savings Account vs. GIC

Cash is king during times of economic trouble. Working families need emergency savings to pay the bills in case of job loss or a reduction in wages. Retirees or near retirees need a cash cushion to avoid selling stocks at a loss. But should you park your cash in a high interest savings account or a GIC?

For a short time, not too long ago, we lived in the golden age of high interest savings. The competition was lively, as online banks and credit unions pushed interest rates well above 2 percent (LBC Digital briefly paid 3.3 percent). Rising interest rates on savings deposits made GICs look less attractive. GICs paid the same rates or lower, yet savers had to lock-in their deposits for 1-5 years. Where did the liquidity premium go?

High Interest Savings Account rates

The situation quickly changed when the coronavirus pandemic forced central banks to take emergency action and cut interest rates. The Bank of Canada lowered its key interest rates by 50 basis points on two occasions. The ripple effect caused high interest savings account rates to plummet.

LBC Digital had already lowered its rate to 2.8 percent – now it sits at a still respectable 2.25 percent. Wealthsimple Cash had arguably the worst-timed launch when it came out with a 2.4 percent interest rate for its chequing/savings account hybrid. That rate was quickly dropped to 1.9 percent, and then lowered again to 1.4 percent.

EQ Bank lowered the interest rate on its Savings Plus account to 2 percent, while motusbank dropped its rate to 1.75 percent. What a difference a month makes!

Here are the top high interest savings account rates today (March 25, 2020):

Bank Interest rate
LBC Digital 2.25%
Motive Financial 2.20%
Implicity Financial 2.10%
Outlook Financial 2.10%
EQ Bank 2.00%
Oaken Financial 2.00%

 

As always, savers need to look beyond the big banks to maximize the interest earned on their deposits. If inflation averages 2 percent, then you need to earn at least 2 percent on your savings to maintain purchasing power. Even still, at best you’re treading water.

Despite the recent drop in rates, a high interest savings account is still the best place to park your emergency savings. You never know when you’ll need to access cash for an unexpected bill, or to pay for your living expenses during a period of unemployment.

A high interest savings account is also a must-have for retirees and near-retirees to stash one year’s worth of spending – the first bucket in the three-bucket approach to retirement income planning.

What this current rate crisis has highlighted is the fact that high interest savings account rates are not guaranteed. Those who eschewed GICs to chase higher yielding savings accounts now find their savings account paying 0.50 – 1.00 percent less than it was a month ago. Not ideal.

GIC rates

One of my clients recently alerted me to an email sent by Oaken Financial advertising an increase in GIC rates. Its one-year GIC now pays 2.5 percent, which is a full 25 basis points more than the top-paying high interest savings account. Oaken’s five-year GIC now pays 2.95 percent interest. It looks like the liquidity premium is back.

You’ll easily find one-year GIC rates paying at or above the best high interest savings account rate.

Bank Interest rate
Oaken Financial 2.50%
Canadian Tire Bank 2.50%
EQ Bank 2.40%
Wealth One Bank of Canada 2.40%
Peoples Trust 2.30%

 

Longer-term rates vary widely so be sure to shop around for promotions. Here are the top five-year GIC rates as of this writing:

Bank Interest rate
Oaken Financial 2.95%
Wealth One Bank of Canada 2.60%
Canadian Tire Bank 2.55%
EQ Bank 2.55%
Peoples Trust 2.55%

 

Readers should know that GICs are typically non-redeemable, so you should be absolutely certain that you won’t need the money when you lock it in for 1-5 years.

That means GICs are ill-suited for an emergency fund, but ideal for a goal with a specific time period.

Using High Interest Savings Accounts and GICs for Retirement Income

For retirees and near-retirees, GICs are best-suited for “bucket two” in your three-bucket approach to retirement income. Bucket two is where you build a GIC ladder with three to five years of annual retirement spending.

Let’s assume that your annual spending is $60,000 and you expect to receive $12,000 from a defined benefit pension plan, $8,800 from CPP, and $7,200 from OAS. You have a total of $28,000 from these sources, meaning you require an additional $32,000 per year from your retirement savings.

You’d ideally put $32,000 into a high interest savings account for this year’s living expenses – transferring funds to your chequing account as needed. This is bucket #1.

Then, you’d put $32,000 each into a one-year, two-year, and three-year GIC (total of $96,000). This is bucket #2. When the one-year GIC matures, transfer it to a high interest savings account to replenish bucket #1.

Bucket #3 contains your investment portfolio of stocks and bonds (ideally in low cost ETFs). Each year you may sell bonds to replenish the money in bucket #2, and then rebalance your investment portfolio (potentially selling stocks to replace your bonds).

Using a high interest savings account and GICs in this way provides retirees with a safety net of retirement income so they’re not forced to sell stocks during falling markets. Practically speaking, that means a retiree could delay withdrawals from his or her investment portfolio in a down year like this – knowing there is four years of spending available in cash and GICs.

Final Thoughts

Cash (or access to it) plays a crucial role in any financial plan. Its importance is highlighted even more during tough economic times, when we’re faced with massive layoffs and falling stock prices.

Well-prepared savers have even been hit by declining interest rates on deposits. My advice to savers is twofold:

  1. Park your emergency fund or short-term cash in a high interest savings account that pays 2 percent or more. Respect CDIC limits ($100,000) and ideally keep no more than one year’s worth of expenses in this account
  2. Put additional cash savings into a GIC (or GICs) while being mindful of when you’ll need to access the money. Is it worth an extra 25 basis points to lock your money in for five years? Consider a shorter term or a GIC ladder approach.

Readers: Where are you parking your cash these days?

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25 Comments

  1. Nancy Constable on March 25, 2020 at 12:31 pm

    Good information, thank you. I have been wondering and worrying about how to get from saving mode to retirement spending mode. Nice and simple advice. Any other advice in this regard is welcome.

    • Jan on March 25, 2020 at 3:15 pm

      Nancy, I read The Retirement Income Blueprint by Darryl Diamond just before I retired. This book addreses the change from savings to spending when you retire. It was excellent. It discusses the buckets in more detail. Hope it helps you.

      • Nancy Constable on March 25, 2020 at 4:58 pm

        Thanks very much Jan. I will be sure to read it. I would like to feel comfortable about spending in retirement without fear of running short!

        • Kevin on March 27, 2020 at 6:07 am

          Can you count any income such as dividend or interest you expect to receive from your portfolio over the next 5 years? I do realize dividends can be cut or reduced at any time mainly at times like now so perhaps you can include a portion. This will mean you need less in bucket.?

          • Nancy Constable on March 28, 2020 at 11:50 am

            Hi Kevin, I’ve got enough saved and could take some dividend income out any time. I just want to have a good plan in place so I don’t have to worry constantly about what I’m doing. I’d like to leave my CPP and OAS alone until I am 70 (64 now). Thanks for responding.



    • Toby Stewart on March 26, 2020 at 3:18 pm

      Nancy; So does Fred Vettese’s “Retirement Income for LIfe” — highly recommended!

      • Jan on March 26, 2020 at 3:40 pm

        That’s the other book I was trying to remember the title of. It was excellent also.

        • Nancy Constable on March 28, 2020 at 11:45 am

          Thank you Toby, and Jan. I’ll get busy reading!

  2. Mike A on March 25, 2020 at 1:19 pm

    You can still negotiate with HISA online banks. I called Tangerine in Jan, got posted rate of 1.1% increased to 2.3% for six months, will call again when that expires.
    Just last week (after rates came down) I called regarding my mom’s account, it was increased from posted 0.7% to 2.4% for 3 months.
    Both accounts are six figures, maybe that makes a difference. It is a nuisance to call in as wait times aren’t great, but many of us have plenty of time on our hands these days.

    • Robb Engen on March 25, 2020 at 1:47 pm

      Hi Mike, good point and thanks for sharing your experience with negotiating a rate increase.

    • Chuck on March 25, 2020 at 5:14 pm

      Is there any chance CDIC will consider protecting deposits of $125k, 150k or more?
      FDIC in the U.S is 250k.
      Thanks

      • Robb Engen on March 25, 2020 at 5:23 pm

        Hi Chuck, interestingly enough – Bill C-13 that was just passed in the House today includes an amendment to the Canada Deposit Insurance Corporation Act:

        12 (1) Paragraph 12(c) of the Canada Deposit Insurance Corporation Act is replaced by the following:
        (c) so much of any one deposit as exceeds the amount set out in subsection 12.‍01(1).
        (2) Paragraph 12(c) of the Act is replaced by the following:
        (c) so much of any one deposit as exceeds one hundred thousand dollars.

        13 The Act is amended by adding the following after section 12:
        Amount
        12.‍01 (1) The amount referred to in paragraph 12(c) is one hundred thousand dollars, unless the Minister determines a greater amount, in which case the amount referred to in that paragraph is the amount that the Minister determines.

        • Chuck on March 26, 2020 at 5:02 pm

          Hi Robb,
          Maybe all this sitting around is making my brain mush. I have re-read your reply three times and while I appreciate your efforts, what the heck does it mean? Lol
          Thanks

          • Robb Engen on March 26, 2020 at 6:33 pm

            Ha, sorry Chuck! I just copy-pasted from the Bill – which was probably written by lawyers.

            What I think it means is the Minister of Finance (Morneau) now has the power to raise the $100,000 CDIC coverage limit at his discretion.

            Hopefully we’ll find out the intention and what it means in the coming days.



  3. Ian Lewis on March 25, 2020 at 1:38 pm

    In these troubled times, I would be careful in using HIS/GIC’s for some of these institutions. They are offering high interest rates because they have more trouble raising funds than the big banks.They may become insolvent and need to be bailed out by CDIC. I know you should get your money back but it may end up tied up for a while just when you need it. Its not worth taking much risk with money you may need just to get a measly extra 1% interest,

    • Robb Engen on March 25, 2020 at 1:46 pm

      Hi Ian, you’re right in that banks like Oaken and EQ are offshoots of subprime lenders (Home Trust and Equitable) who may suffer in a down economy. However, I don’t believe your concerns around CDIC are warranted.

      Back in 2017, when Home Capital Group was in trouble, I looked extensively into CDIC and what specifically would happen if the bank went under. CDIC would work fairly rapidly to reimburse chequing and savings accounts, joint accounts and mortgage tax accounts within three business days.

      Since its creation by Parliament in 1967, CDIC has handled 43 failures, affecting more than 2 million depositors. No one has lost a single dollar under CDIC protection.

      https://boomerandecho.com/cdic-protect-deposits-home-capital-goes-bankrupt/

  4. Christian LK on March 25, 2020 at 2:14 pm

    My Tangerine high interest saving accounts still say they are offering the temporary rate of 2.7% for the remainder of time I have as being a new client (5 months term). Happy to see that they didn’t lower the rates after the down turn. They’re still offering 2.5% to new clients now for the first 5 months.

  5. Janet Chappell on March 25, 2020 at 2:28 pm

    3 month GICS are at 2.45% with EQ .. ie higher than their/most current 2.0% savings .. just saying.

    • Douglas Badger on March 25, 2020 at 6:01 pm

      Yes, I recently took advantage of this, moving some funds after the regular EQ savings rate dropped to 2.0% I ensured cash flow wasn’t impacted by the 3 month commitment.

  6. Bob Wen on March 25, 2020 at 10:00 pm

    Robb, is there any reason that you didn’t mention parking several years’ worth of cash in a bond ETF such as BMO’s ZAG?

    • Robb Engen on March 26, 2020 at 9:34 am

      Hi Bob, while bond ETFs have some liquidity advantage, they can be extremely volatile (look at what happened on March 18th when ZAG fell nearly 10% in one day). That can be gut wrenching for investors to watch their fixed income allocation plummet.

      Here’s a great article comparing bond ETFs to a GIC ladder: https://www.canadianportfoliomanagerblog.com/gics-vs-bond-etfs-a-case-study-and-bold-adventure/

      • Bob Wen on March 27, 2020 at 11:14 am

        Yes, the drop in bond values did indeed take me by surprise. I’ll ponder a little more as there’s no rush. Thanks Robb

  7. Pam Fines on March 27, 2020 at 9:19 am

    I was just thinking about doing a GIC ladder for some extra place to stick some cash and I am thinking about it more seriously now. I think i’ll wait about 6 months as I am just to panicked about life in general right now to trust myself to make sensible decisions. Also, I am (right now) in no real risk of losing my job (but a reduction in hours or salary is possible).

    I am financially stable so I am going to let things settle a bit and then start figuring out what next.

  8. Dwight on March 29, 2020 at 10:15 pm

    I like the idea of using a high interest savings account for the current year, and then backfilling it from a GIC ladder. But, I find it difficult to replenish the GIC ladder at the moment because both equity and bond ETF’s have taken a tumble in the current market. You mention that “a retiree could delay withdrawals from his or her investment portfolio in a down year like this – knowing there is four years of spending available in cash and GICs.” I would be interested to know what your thoughts are regarding when to resume withdrawals to recharge the GIC ladder.

    • Robb Engen on March 30, 2020 at 2:09 pm

      Hi Dwight, the nice thing about this approach is you can afford to wait for markets to recover before replenishing your GIC ladder. The only downside is the timing of maturity will be off unless you get a short-term 3-6 month GIC to get all of your terms back in-line.

      As for the timing of withdrawals, I guess it depends which bond ETF you hold. VAB is only down 1.2% in the past three months, while XCB is down 7.5%. Some bond ETFs suffered very large one-day drops in the past few weeks, but perhaps they will stabilize soon. Finally, it also depends on how soon you want to replenish your GIC ladder. If you can afford to wait until your bonds are back in positive territory then do so. But selling VAB now at a 1.2% loss shouldn’t be that big a deal.

      One other thought is to hold off on replenishing the GICs right now and instead rebalance your investment portfolio by selling bonds and buying more equities.

      Eventually, though, you will have to withdraw from your investments to re-fill GICs. Timing can be tricky as bear markets can last anywhere from several months to several years. You’ll have to use your best judgement, or work with an advisor who can assist in this planning.

      One final thought: Some retirees take a dynamic spending approach to retirement, spending more when markets are up and spending less when markets are down. That could mean holding off on a major project or purchase in years like this. Many of my clients have a range of spending, with say a baseline of $50,000 per year and then a floor of $42,000 and a ceiling of $58,000 depending on market performance.

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