The return on a GIC is paid in the form of interest.
The interest rate varies according to the term of the GIC. Generally, the longer the term, the higher the interest rate.
You can increase your return by laddering different GIC terms. For example, you can divide your investment between a short term GIC (less than one year), a medium term GIC (1-2 years) and long term GIC (3 years or more). This would give you a higher overall return as longer terms typically offer higher interest rates.
Interest is ‘compounded’ when you earn interest on your interest.
If the interest earned is left in the GIC, the interest rate is applied to the original deposit as well as to the amount of interest earned, therefore you would be earning interest on interest. For example, if the GIC is for a 2-year term, at the end of Year 1, you could choose to add the interest earned to your GIC (compound the interest). If so, interest for Year 2 will be calculated on your original principal and on the interest earned in Year 1 (interest on the interest).
Compound interest can make a big difference in the amount of return that you earn over time.
Yes you can use a GIC to invest for your retirement. Investors who prefer the GIC like knowing that their investment is not at risk and the funds will be available when they retire. They also like that there no fees associated with a GIC.
A GIC can be held in a RRSP or RRIF for retirement purposes. The interest earned will not be taxed while held in the RRSP or RRIF. Withdrawals will be taxed in the year of the withdrawal.
A GIC can be held in a TFSA and the interest earned will not be taxed and neither will the funds when they are withdrawn from the TFSA.
It is important to consult with a Financial Services Advisor to review the investment options for your retirement, ensuring that you are accumulating the required amount and minimizing taxes.