Bond Ladder or GIC Ladder
Distribute maturities around your withdrawals, then compare principal guarantees, credit risk and liquidity.
In this article
To fund withdrawals spread over several years, two ladders are possible: staggered GICs or quality bonds at the same maturities. First set the maturities according to your actual needs, with one tranche per withdrawal year, sized for that year. Then choose the instrument using three criteria, in this order. The guarantee: deposit protection for the GIC, the promise of a rated issuer for the bond. Liquidity: a bond sells any day at market price, while a non-redeemable GIC waits for maturity. Net yield at comparable risk: the gap pays for exactly those differences. A mix is often best. Use GICs for the short rungs, where the guarantee comes first, and bonds for the long ones, where the extra yield builds up and the option to sell is reassuring. This article compares the two instruments criterion by criterion and explains how to build a mixed ladder that renews with one decision a year.
Set the maturities on real needs
A ladder spreads an amount across several successive maturities: a fifth at one year, a fifth at two years, and so on. A portion therefore matures each year. To make it useful, start from your calendar of needs. A retiree who will withdraw $30,000 a year lines the maturities up with those withdrawals. A ladder built without regard to needs produces maturities at the wrong time. You then have to lock up funds you need, or reinvest sums that should have stayed available.
Compare the guarantee and the credit risk
The two instruments differ more by guarantee than by yield. A guaranteed investment certificate offers principal guaranteed by the issuer, plus deposit protection up to the applicable limits. A bond exposes you to the issuer's credit risk. A government bond carries minimal risk. A corporate bond carries real risk, offset by a higher yield. That extra yield is not free: it is the price of a risk. To compare the two ladders honestly, use issuers of comparable quality and do not rely on posted rates alone.
Verify what is genuinely liquid
The most important practical difference is access to funds before maturity. A non-redeemable certificate is locked until term, with no exceptions: five years means five years. A bond can be sold on the market at any time, but at a price that depends on prevailing rates. If rates have risen, you may take a loss. Neither option offers costless liquidity. The ladder itself answers this problem: because a tranche matures every year, you have money available regularly without selling anything before term.
Compare net returns, at comparable risk
Finally, compare what is left after fees and tax. A bond held in a taxable account produces fully taxable interest. Buying it often involves a sizeable bid-ask spread on small amounts, which a certificate sold at face value does not have. A bond fund adds annual management fees. At comparable posted yields, these costs often favour the certificate for small portfolios. Larger portfolios benefit more from the flexibility of bonds. The type of account, registered or not, completes the calculation and often settles it.
Quebec scenario
A couple in Cap-Rouge sets aside $100,000 for their next ten years of withdrawals. Two ladders are possible: five GICs staggered from one to five years, or five quality corporate bonds at the same maturities. The advisor presents the criteria, with no favourite. First, the guarantee. The GIC promises the capital at maturity and has deposit protection, within the applicable limits. The bond promises repayment by the issuer. That promise is solid according to the credit rating, but it remains a corporate promise. Next, liquidity, which matters most if the couple might need the funds before maturity. A bond can be sold on the market any day, at a price that moves with rates. A non-redeemable GIC cannot be sold: you have to wait. Last, yield, at comparable risk. That quarter, quality bonds offer about 0.4 points more than GICs of the same maturity. The gap pays for the difference in guarantee and partly offsets purchase commissions. The couple combines the two. They take GICs for the one-to-three-year rungs, where the guarantee comes first and the wait is short. They take bonds for the four- and five-year rungs, where the extra yield builds up longer and the option to sell is reassuring. At each annual maturity, they ask the same questions in the same order: guarantee, liquidity, net yield.
Checklist
- Spread the maturities by the planned withdrawals
- Size each tranche to its year
- Compare deposit protection with issuer promise
- Weigh each instrument's liquidity
- Compare net yield at similar risk
- Choose GICs for the short rungs
- Consider bonds for the long ones
- Check the bonds' commissions and spreads
- Rerun the three criteria at every renewal
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