High Interest Savings Accounts
High interest savings accounts offer higher interest rates than the typical savings accounts offered by banks and other financial institutions. These rates can sometimes be as good as those for GICs, but your funds are not locked in.
Some banks may want a minimum deposit amount before you qualify for their best rate, such as $5000. You need to confirm the requirements before putting your money into any savings vehicle, because there are plenty of financial institutions that do not have these minimum requirements.
High interest plans may be a good vehicle for short-term savings. Interest that you earn will be taxable as income to you for the current tax year, which is an important consideration when choosing where and how to invest your money.
Guaranteed Investment Certificates/Guaranteed Deposit Accounts
Guaranteed Investment Certificates, also called GICs, are investments offering a guaranteed rate of return over a specific time period. For example, if you buy a $1000, 3-year GIC at an interest rate of 2%, you will receive your $1000 plus 2% back in 3 years.
Investors consider GICs to be low-risk investments, because they are backed by the funds of the financial institution and usually CDIC (Canada Deposit Insurance Corporation). However, there are limits on the amount CDIC will cover. Because GICs have a lower risk, they also have a lower rate of return than many other investments, such as stocks and mutual funds.
You can hold GICs in many types of accounts, including RRSPs and TSFAs. The term of your deposit can be as little as 30 days or as long as 10 years. Generally, the shorter the term, the lower the rate offered by the financial institution. Rates fluctuate with current interest rates and the lending rate set by the Bank of Canada (BOC).
If you need to withdraw funds from your GIC early, you will likely pay a penalty on your interest rate. In some cases, this means you receive no interest, only your principal amount back.
Investment funds are pooled funds meant to offer professional management and diversity to investors.
The types of securities held in these investments are based on the stated goals of the fund. Some funds are meant to provide current income, and will hold securities such as government and corporate bonds, money market funds and dividend-paying stocks. Other funds may have growth as their aim, and would invest in more aggressive securities, such as equity and small capitalization stocks. Investment funds can also be allocated based on a geographical preference, such as holding securities only from Canada, Latin America or Asia. Because of the different types of securities involved, the risks involved with investing in investment funds varies widely.
Many of these funds receive active management by a fund manager. This person is in charge of selecting and changing the securities held in a fund, with the aim of maximizing returns for investors. Other funds are more passive in nature, choosing to hold securities to match an existing index or exchange. For example, a fund might try to hold the same companies in the same proportion as the Toronto Stock Exchange (TSX).
Investment funds are generally bought and sold directly from the issuing company. You do not purchase shares from an exchange, such as the TSX. All of these funds come with management fees, to cover the cost of managing the fund. When looking to invest in any of these funds, you want to consider the cost to purchase the fund, the management expense ratio (MER) and the aim of the fund. Fees are usually lowest for the passively managed funds, such as those following an index, and highest for the actively managed funds. Expect fees that range anywhere from 1.5% of your investment to 4.5%.
Segregated funds can only be sold by insurance companies and they come with a few added benefits that other investment funds don’t have. Segregated funds have maturity and death benefit guarantees. This means the insurance company guarantees a portion of your investment, usually 75%. Upon your death or the maturity of your account, the insurance company will pay out at least 75% of your initial investment (subtracting any withdrawals you have made since starting your investment in the fund). This guarantee helps protect you against market fluctuations.
Annuities are investments that provide guaranteed level-income payments for a set period of time. The income level depends on how much money you put into your annuity. The time can be set for 10 or 20 years, or guaranteed for life, depending on your needs. Only insurance companies are allowed to offer annuities. Although they have fallen out of favour over the last decade or two (due to lower interest rates), it is important to understand what annuities are and how they might work for a portion of your retirement income. Some people find annuities add peace of mind for their retirement plans.
Term Certain Annuity or Annuity Certain
This is a guaranteed income payment for a specific period of time, usually 5 to 25 years. You give an insurance company a lump sum of your money, and they return it to you with interest in monthly, quarterly, or annual payments, until the guarantee period is over. These are particularly useful when you have a specific expense you wish to cover, for a set period of time. (Think of getting 7 year financing on a car at 0%. If you have the full amount to pay in cash, you might consider a 7 year Term Certain Annuity. You then know you will have the monthly cash flow to make the payments. You will also earn a little bit of interest on the annuity.)
If you pass away during the term of this annuity, your beneficiary or estate is entitled to all of the payments that have not yet been made.
Single Life/Joint and Survivor Annuity
This annuity is guaranteed to provide income for the remainder of your life (or you and your spouse in the case of a Joint and Survivor Annuity). The biggest objections that most people have with this option are that the funds are locked in with the insurance company and you might not get much of your principal back if you die shortly after buying the annuity. This was once the case, but there are increasingly more options available to help defray these possible risks and ensure that you are far more likely to get the full value from the funds you place in a life annuity.
A joint and survivor annuity is a great way to help you receive full value, as one spouse often outlives the other by a fair number of years. You can also have payments that are guaranteed for 5 to 20 years, so if you do die early you can guarantee a minimum amount will be paid out to your beneficiaries or your estate.
There are plenty of options available, but you should never consider putting all of your money into an annuity, unless you have some very specific needs that can only be solved by using this investment option.