Friday, October 5, 2018

Managing a GIC Ladder in Retirement

The following good question about managing a GIC ladder during retirement came from AT in Calgary (edited for length and privacy):

I’m 100% FIREd and have no regrets about this. After working for 30+ years, I was just done. I spent the better part of a year learning about money, and your articles have been particularly helpful.

I have put 3 years into GICs (1,2,3) and the '1' comes due 2019 May 1. Assuming I stick with the 3 year model, do I roll that one into a new 3 year GIC and then continue as before?

That seems to make sense but here is my question that I can't quite wrap my head around. If I lock it in on May 1st, then what happens if the market crashes on May 2nd? Somewhere there has to be a cash cushion for that year unless I just have to bite the bullet and draw down my registered money. What do you think?

First of all, congratulations on retiring! I know I felt great about retiring to my personal projects rather than doing what other people wanted me to do. I’m glad you like the blog. I’ve learned a lot about finances writing it.

I’ll describe how I handle the cash and GICs part of my portfolio, and you can decide for yourself whether you want to apply it to your own portfolio. I began retirement with 5 years’ worth of spending in cash and GICs, and have the rest of my portfolio in stocks. One year of cash was in a High-Interest Savings Account (HISA) at EQ Bank paying 2.3% interest. The other 4 years were in GICs of duration 1, 2, 3, and 4 years. Note that I don’t have a 5-year GIC.

During my first year of retirement, I spent the cash in the HISA. At the end of that year, my 1-year GIC came due. Because nothing bad had happened in the stock market, I rolled the GIC cash into a new 4-year GIC, and sold stocks to refill the HISA. So, I started the year with 5 years of cash and GICs, but this dwindled to 4 years before I topped it up again.

Suppose the stock market had crashed so severely that I decided to reduce my annual spending. To make this more concrete, suppose my planned annual spending from my portfolio had dropped from $50,000 to $45,000. With $50,000 in cash and $150,000 in GICs, I would only have needed to sell $25,000 worth of stocks to get to 5 years’ worth of cash plus GICs. $45,000 would then have gone into my HISA, and I’d have bought a $30,000 4-year GIC.

There are plenty of minor complications in all this. One is reducing the amount in the HISA and GICs to account for dividends in non-registered accounts that you could spend instead of reinvesting. Another is that a buying a small GIC could lead to being short of cash in the future. This is easy enough to handle by just keeping a little extra cash in your HISA. Of course, you have to stay on top of your spending level. You can’t start spending more just because there’s extra cash in the HISA.

The important part of all this is that I always have enough cash in the HISA to maintain my planned spending level until the next GIC comes due. So, I’m never in a position of having to draw down my stocks during a short-term mid-year stock market crash.

So, AT, you can compare your approach to mine and decide whether there is anything you want to change. Good luck.


  1. Does this mean that in a crash you would anticipate reducing your spending over the next 5 years and buy smaller GICs? If there was a quick recovery the next year would you sell more stocks and keep more cash to increase your spending over the remaining 4 years?

    1. Another complication: in this scenario you have $50,000 in cash from the GIC. You would need $45,000 in cash for the next year's spending and $45,000 to buy a new GIC. That seems like it would require selling $40,000 in stocks, or 20% less than usual.

    2. @Richard: Keep in mind that most of the GICs are already purchased. So, as I explained in the article, I buy one smaller 4-year GIC (only $30,000) so that when we add this to the 3 others at $50,000 plus the $45,000 in cash, I have the required 5x$45,000 = $225,000.

      Every year I make a new decision about my anticipated annual spending. (Actually, it's a spreadsheet calculation done automatically.) Taking into account the value of my current GICs and cash on hand, I can then figure out how many ETF shares to sell to get to a total of 5 times annual spending. From the resulting cash, I keep one year's spending in a HISA, and put the rest in a 4-year GIC.

  2. Hi Michael. You make a good point about reducing your spending in a market downturn.
    I also keep 5 years worth of cash on hand (HISA and 4 GICs) for future spending. I will renew the GICs and take funds from my investments while we're still in this bull market. However, when there is a market downturn, I will likely attempt to ride it out by just using my GIC money until I see some profits again.

    1. @Marie: Most people make tactical decisions on how much to reduce spending in a market downturn. My decisions are driven by preset spreadsheet calculations. Either way, it's sensible to sell fewer stocks in a downturn.

    2. The exchange below is reproduced to remove broken links.

      ----- Unknown October 11, 2018 at 4:21 PM

      Hello Michael, where could I have a look at that spreadsheet?

      ----- Michael James October 11, 2018 at 4:56 PM

      @Unknown: I've tried a few times to make a generic version of my spreadsheet, but it tends to grow too much when I think of different things other people might need that I don't need. As it is, my spreadsheet has many interacting elements that are specific to my situation. I won't say I'll never create a version I can share, but I have no current plans to do so.

      ----- Unknown October 11, 2018 at 5:56 PM

      thanks Michael

  3. Hi Michael...thank you for your prompt reply. Makes sense. I will let it percolate for a few days and then act. AT

    1. @Bombersez: It's amazing how a seemingly simple idea can get so complex when you try to implement it. Good luck.

  4. A lot of the magic here is deciding you can safely spend for the next year. Are you using the filtering strategy that you posted about? I looked it up, can you believe it's already 5 years ago?

    Are you using the 40/20 months to increase/decrease spending to match outperforming/underperforming markets parameters?

    1. @Greg: I think the filtering strategy makes sense. I'm not using it, simply because my wife and I don't spend anything close to our limit. I kept working longer than I needed to. And with the stock market run up in recent years, my safe monthly spending amount is about 50% higher than we tend to spend. It seemed pointless to do any filtering in our case.