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A 74-year-old reader with a chunk of GIC money coming due has a question that anybody investing in guaranteed investment certificates these days has to be asking.

Go with a five-year GIC and get the highest rate possible, or use a five-year ladder that allows you to capitalize on higher rates in the next few years?

Returns on five-year GICs vary widely, depending on where you buy them. Even the big banks differ a lot – Cannex.com showed Bank of Nova Scotia at 1.6 per cent as of late October, Bank of Montreal at 2 per cent and Royal Bank of Canada at 2.2 per cent. Significantly higher rates were available from the likes of Tangerine and Simplii Financial at 3.1 per cent, Manulife Bank at 3.25 per cent, and Oaken Financial at 3.6 per cent.

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Because of its middle-ground rates, let’s use Tangerine as a point of comparison between a five-year GIC rate and a five-year GIC ladder. A ladder is where you invest equal amounts in GICs maturing in one through five years. Tangerine offers 2.75 per cent for one year, 2.95 per cent for two years, 3 per cent for three years and 3.05 per cent for four. Average the rates for the five rungs of the ladder and you get 3 per cent (actually, 2.97 per cent).

To recap, that’s 3.1 per cent for the five-year GIC and 3 per cent for the ladder. Advantage, ladder. At barely any rate penalty, you get the flexibility to renew some of your money at higher rates in the next few years.

Sure, there’s a risk that the economy will peak and send rates lower at some point in the next five years. But the Bank of Canada recently sent a strong signal that it wants to increase rates to more normal levels. Even after several rate increases since the summer of 2017, rates are still at exceptionally low levels by historical standards.

The five-year GIC at 3.1 per cent isn’t a bad deal. Five-year Government of Canada bonds yield about 2.4 per cent, and the September inflation rate was 2.2 per cent. But the ladder gives you a chance to do better than 3.1, with a worst case that you make only slightly less.

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