Historical 5 Yr GICs

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Historical 5 Yr GICs

Post by bill2009 » 05 Jun 2017 10:38

Is there a source for representative 5 year GIC rates by year? I'm trying to back check a friend's managed RSP portfolio against a straight laddered GIC approach. I found https://www.ratehub.ca/blog/the-history-of-gic-rates/ which only goes to 2009 and i'm not clear on the provenance. I thought about using XBB but, certainly over the past decade XBB has just had a heck of a run vs GIC's.

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Re: Historical 5 Yr GICs

Post by longinvest » 05 Jun 2017 11:12

https://www.tangerine.ca/en/rates/histo ... index.html goes back to May 2007 and represents a hassle-free GIC ladder (no rate negotiation, no moving accounts from bank to bank).

I wouldn't approximate historical cash investment returns with bond returns anymore than I would approximate historical bond returns with stock returns.
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Re: Historical 5 Yr GICs

Post by brucecohen » 05 Jun 2017 11:42

This goes back to 1985 and a footnote cites a StatCan table as source. Bank of Canada used to publish GIC rates in a hard copy publication. I think it was called The Bank of Canada Weekly though it might have been their monthly publication whose name I forget.

In 2002 I helped Jim Daw, then personal finance writer for The Toronto Star, with the same type of analysis. A reader asked how someone who had opened an RRSP when the program began in 1957 would have done with GICs versus stocks and bonds. We found one balanced mutual fund that was publicly available in 1957. It was from Investors Group and they gave us detailed performance data. We then used Bank of Canada data to create a ladder of 5-year GICs. We found that the GIC ladder beat the mutfund. The article was criticized for end date bias because only one investment was made each year, on the same date, but that was the question the reader asked and the effort was for a newspaper, not an academic journal. Googled links to the article all connect to the Star website which unfortunately no longer contains the article. A brief note on Bylo Sellhi's old site says Daw did updates two times in subsequent years and got pretty much the same result.

The same analysis done now might produce a different result because today's mutfund fees are lower than in the distant past. Also, our hypothetical GIC ladder got a big boost from the sky-high rates available in the late '70s and early '80s. Of course, the mutfund got a boost from big bond gains when interest rates then plummeted. On yet another hand, our GIC performance was hobbled because the BoC tracks only GICs from the chartered banks (and big trustcos when they existed) so we could not invest in higher yielding CDIC-insured GICs from small institutions.

If you accessed ratehub you probably saw this in which accountant David Trahair makes an updated case for GICs. But he compares GICs to stocks alone. I think a better comparison is to a balanced fund which reflects both stock and bond performance.

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Re: Historical 5 Yr GICs

Post by SoninlawofGus » 05 Jun 2017 13:02

It's not GICs, but Norbert's Libra data has all the data any reasonable person would need to compare FI over time vs. inflation, stocks, etc. back to 1970.
brucecohen wrote:
05 Jun 2017 11:42
If you accessed ratehub you probably saw this in which accountant David Trahair makes an updated case for GICs. But he compares GICs to stocks alone. I think a better comparison is to a balanced fund which reflects both stock and bond performance.
With five-year rates in the 2.2-2.6% range, that's 0.6% to 1.0% real vs CPI today. Given global stock market valuations and Canada's low dollar valuation versus the US dollar, that might be a comparable return for the next ten years or so. But only at the end of the article does he mention non-taxable investments, which is kind of defeats the "only GIC" argument. The other issue is the degree to which rates go lower, stay stable, or go higher and then how those rates tracks inflation. For planning purposes, I'm assuming closer to 0% real on FI, but then I'm very conservative about such things.

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Re: Historical 5 Yr GICs

Post by bill2009 » 05 Jun 2017 13:20

thanks very much. those are great references.

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Re: Historical 5 Yr GICs

Post by bill2009 » 06 Jun 2017 11:32

This is obvious in retrospect but i offer it for what it's worth:
-If you're trying to estimate the performance of a portfolio of 5 year GICs you can't use the posted rate in each year. You have to use some sort of blend of the preceding 5 years. Or only reset the rate every 5 years.

Also worth noting - it's striking how well XBB has done over the long run, i guess as interest rates have fallen. We have a fair bit of it and i just treat it as a cash cow so i don't sweat the capital value.

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Re: Historical 5 Yr GICs

Post by NorthernRaven » 06 Jun 2017 12:04

brucecohen wrote:
05 Jun 2017 11:42
This goes back to 1985 and a footnote cites a StatCan table as source. Bank of Canada used to publish GIC rates in a hard copy publication. I think it was called The Bank of Canada Weekly though it might have been their monthly publication whose name I forget.
That's CANSIM table 176-0043, which has series for Chartered Banks GIC at 1, 3 and 5 years. The footnote for those series says "The most typical of those offered by the major chartered banks.", so this is going to be a conservative rate. Probably not so bad in the olden days, but with increased availability and range of GIC issuers to the general public, you'll want to be careful using this rate versus what savvy GIC investors are getting. For instance, the 5-year series (v122526) shows May at 1.12%. That's below what even some of the Big5 banks are currently offering, much less some of the smaller institutions - one can get 2%+ from a wide range of CDIC and CU institutions.

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Re: Historical 5 Yr GICs

Post by AltaRed » 06 Jun 2017 12:07

bill2009 wrote:
06 Jun 2017 11:32
Also worth noting - it's striking how well XBB has done over the long run, i guess as interest rates have fallen. We have a fair bit of it and i just treat it as a cash cow so i don't sweat the capital value.
Have you not noticed distributions coming down on a per unit basis? This has to happen as the higher coupon bonds mature or are cycled out of the index.

Go to https://www.blackrock.com/ca/individual ... ionsDialog Distributions popup and select "Calendar Year", and look at the Other Income column from 2001 to current year. Other Income was 1.50882/unit in 2001 and it was 0.90516/unit in 2015. Then if you look at the "Recent Year" tab, monthly distributions have come down from 0.07161/unit on Aug 24, 2016 to 0.06971/unit on May 24, 2017.

The annual cap gains and ROC components of annual distributions do cause some lumpiness and are legitimate income from time to time but the key one to watch is Other Income. The slide in monthly distributions will not stop until the index yield curve turns back up such that the replacement bonds have higher coupon rates than the ones being cycled out. No idea when that will be, but it will likely be some years to come yet.
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Re: Historical 5 Yr GICs

Post by 2of3aintbad » 06 Jun 2017 15:24

brucecohen wrote:
05 Jun 2017 11:42
This goes back to 1985 and a footnote cites a StatCan table as source. Bank of Canada used to publish GIC rates in a hard copy publication. I think it was called The Bank of Canada Weekly though it might have been their monthly publication whose name I forget.

In 2002 I helped Jim Daw, then personal finance writer for The Toronto Star, with the same type of analysis. A reader asked how someone who had opened an RRSP when the program began in 1957 would have done with GICs versus stocks and bonds. We found one balanced mutual fund that was publicly available in 1957. It was from Investors Group and they gave us detailed performance data. We then used Bank of Canada data to create a ladder of 5-year GICs. We found that the GIC ladder beat the mutfund. The article was criticized for end date bias because only one investment was made each year, on the same date, but that was the question the reader asked and the effort was for a newspaper, not an academic journal. Googled links to the article all connect to the Star website which unfortunately no longer contains the article. A brief note on Bylo Sellhi's old site says Daw did updates two times in subsequent years and got pretty much the same result.

The same analysis done now might produce a different result because today's mutfund fees are lower than in the distant past. Also, our hypothetical GIC ladder got a big boost from the sky-high rates available in the late '70s and early '80s. Of course, the mutfund got a boost from big bond gains when interest rates then plummeted. On yet another hand, our GIC performance was hobbled because the BoC tracks only GICs from the chartered banks (and big trustcos when they existed) so we could not invest in higher yielding CDIC-insured GICs from small institutions.

If you accessed ratehub you probably saw this in which accountant David Trahair makes an updated case for GICs. But he compares GICs to stocks alone. I think a better comparison is to a balanced fund which reflects both stock and bond performance.
It would have been interesting to have seen that analysis. What strikes me about doing this for an RRSP is how to include the various factors. It is not just that every year, 20% of your portfolio is due for reinvestment. You also might be making new contributions every year, and the limits steadily increase (as presumably does your earned income). So it seems to me that there is a large reinvestment risk with a laddered GIC portfolio. With other investments, you are not required to sell and reinvest a portion every year, if you get what I mean.

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Re: Historical 5 Yr GICs

Post by brucecohen » 06 Jun 2017 18:12

2of3aintbad wrote:
06 Jun 2017 15:24
It would have been interesting to have seen that analysis.
If your local library has The Toronto Star on microfilm look at the Nov 12, 2002 issue.
What strikes me about doing this for an RRSP is how to include the various factors. It is not just that every year, 20% of your portfolio is due for reinvestment. You also might be making new contributions every year, and the limits steadily increase (as presumably does your earned income). So it seems to me that there is a large reinvestment risk with a laddered GIC portfolio. With other investments, you are not required to sell and reinvest a portion every year, if you get what I mean.
We did roll over each year's maturing GIC plus new money into a new 5-year one. I don't remember what we did about the contribution amount but we might have used a fixed amount -- maybe $5,500 if that was the 1957 maximum for someone with no RPP. Or we might have assumed a maximum contribution for someone who always earned the YMPE. Whatever we did passed muster because nobody complained about that and, as you might expect, several mutual fund marketers tried to discredit the article. IIRC, the only complaint was end date bias.

While the need to roll over ever larger amounts at lower rates would hurt the GIC plan's performance, the same would occur with the bond portion of the balanced fund. And much, if not all, of the impact might get averaged out over the long time frame of decades, 45 years in this case. Similarly, someone going the equities route in 1957 would have had to endure something like a 10-year drought in the '70s and I don't know how many crashes, but then benefited from history's biggest bull market which began in 1982. Logically, going 100% stocks over 4+ decades should provide markedly higher accumulation, but I doubt that many people, especially inexperienced investors, have the fortitude to hold up during crashes.

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Re: Historical 5 Yr GICs

Post by Taggart » 06 Jun 2017 19:22

I kept a printed copy of the online article from the Star. It was called "GIC investing measures up" dated Nov 9, 2002.

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Re: Historical 5 Yr GICs

Post by SoninlawofGus » 09 Jun 2017 15:17

AltaRed wrote:
06 Jun 2017 12:07
Have you not noticed distributions coming down on a per unit basis? This has to happen as the higher coupon bonds mature or are cycled out of the index.
I have to move a chunk within a corporate account (I'll be moving on before long) to something in fixed income. My limited choices are not good: five-year GIC at a very low rate, money-market-type mutual fund at an abysmal rate, or a bond fund. Since you seem to have a better feel for this than I do, what would your guess (guessing is fine!) be on a return for a typical, but low MER, bond fund for 6 months to 1 year out from here? I believe the fund would be similar to the TD bond efund.

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Re: Historical 5 Yr GICs

Post by AltaRed » 09 Jun 2017 16:09

I don't have a clue about total return and wouldn't hazard a guess, since bond ETF market prices could be anywhere depending on sentiment about interest rates.

But I am pretty certain distributions from almost all bond ETFs will continue to drop slowly for the foresseable future. Short term bond ETFs should be close to arresting further declines in distributions cause there cannot be that many 'long' bonds left in such ETFs. But their yield/TR is really nothing to scream about. An Oaken GIC right now is better.

That said, I've advised my ex to hold most of her FI in XSB and she has been doing so for some time. Blackrock just dropped the MER to 9bp which will help quite a bit from the >20bp it previously was. Think they dropped MERs on some other bond ETFs too...such as XBB. It's a sad day when we have to grasp for mere basis points.
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Re: Historical 5 Yr GICs

Post by gsp_ » 10 Jun 2017 06:42

AltaRed wrote:
09 Jun 2017 16:09
Blackrock just dropped the MER to 9bp which will help quite a bit from the >20bp it previously was. Think they dropped MERs on some other bond ETFs too...such as XBB.
Thanks for the info, here's the press release.

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Re: Historical 5 Yr GICs

Post by Taggart » 10 Jun 2017 08:55

Norm did a fine piece on bond funds a year ago.

Why your bond funds are bombing

I don't think things have changed much when it comes to bond ETF's and their returns. Have they?

Note: We've owned Vanguard's VSB in the RRSP's for a few years now.

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Re: Historical 5 Yr GICs

Post by longinvest » 10 Jun 2017 09:28

Taggart wrote:
10 Jun 2017 08:55
Norm did a fine piece on bond funds a year ago.

Why your bond funds are bombing
Let's see:
On June 2nd, 2016, Norm Rothery wrote:While Vanguard’s ETFs are famous for their low fees (the three in question cost between 0.11% and 0.13% annually), the yield data is presented on a before-fee basis. As a result, the expected annual returns for the funds (based on each fund’s yield to maturity minus its annual fee) falls to about 1.2%, 1.9%, and 1.9% for VSB, VSC, and VAB respectively.
As of May 31, 2017, the 1-year trailing total return of VAB, after fees, was 2.61%. Unrelated, but the YTD return of VAB was 3.44% more than 2% ahead of the Canadian stock market, VCN, which had a YTD return of 1.13% as of May 31, 2017.

Let me remind readers that nobody can predict the future returns of a widely diversified bond ETF such as VAB. That's because unpredictable future yield curve changes dominate short-term future returns, and unpredictable YTM at time of acquisition of future bonds bought by the ETF dominate long-term future returns.
Last edited by longinvest on 10 Jun 2017 09:40, edited 2 times in total.
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Re: Historical 5 Yr GICs

Post by longinvest » 10 Jun 2017 09:38

The financial porn press always insists that higher interest rates would hurt bonds.

I have yet to find a GIC investor who wishes for future interest rates to be lower. Somehow GIC investors understand that higher rates generally mean higher returns. The same applies to bonds! Higher future rates lead invariably to higher long-term bond returns. It's only in the short term, when one marks bonds to market, that one notices a temporary loss in value to increase the bond's YTM up to equivalent market yields.

One would better skip every single financial press article about bonds. And about stocks, for the matter.
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Re: Historical 5 Yr GICs

Post by AltaRed » 10 Jun 2017 11:20

longinvest wrote:
10 Jun 2017 09:28
As of May 31, 2017, the 1-year trailing total return of VAB, after fees, was 2.61%. Unrelated, but the YTD return of VAB was 3.44% more than 2% ahead of the Canadian stock market, VCN, which had a YTD return of 1.13% as of May 31, 2017.

Let me remind readers that nobody can predict the future returns of a widely diversified bond ETF such as VAB. That's because unpredictable future yield curve changes dominate short-term future returns, and unpredictable YTM at time of acquisition of future bonds bought by the ETF dominate long-term future returns.
I agree but a good part of the confusion is due to not understanding the difference between the 'mark to market' effects of bond pricing and the actual distribution component of a bond ETF. Bond prices, especially for mdium and long term bond ETFS, wil fluctuate significantly with market sentiment on where the yield curve is going. Distributions, on the other hand, continue to drop for some time yet as the higher coupon bonds fall out of the mix (the premium bond issue). So one must be careful what one is talking about when discussing the subject.

Bond ETFs are obviously an important part of a Couch Potato portfolio. Just need to remember that the distributions will continue to decrease for some indefinite time yet.
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Re: Historical 5 Yr GICs

Post by longinvest » 10 Jun 2017 11:56

AltaRed wrote:
10 Jun 2017 11:20
Just need to remember that the distributions will continue to decrease for some indefinite time yet.
Maybe, maybe not; I don't know. Are you waiting for "BMO Capital Trust II 10.22% Dec 31/2107" to mature and be replaced by a smaller-coupon bond? That's in 90 years from now. :wink:

Oh! And, how do you know that coupons will be smaller in 2107?
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Re: Historical 5 Yr GICs

Post by AltaRed » 10 Jun 2017 12:05

I am willing to bet the monthly/annual XSB/XBB distribution for 2017 will be lower than it was in 2016. There are a few bumps now and then due to Cap Gains or ROC distributions that can temporarily disrupt that trend but those are not consistent year to year. I've mapped the annual distributions for XSB, XBB and ZCM over time (all of which I've either owned or recommended to others) and the trend has been consistently downward. Specifically I looked at XBB since its beginning in 2001.

Added: 5 year distribution history for XBB: http://quote.morningstar.ca/Quicktakes/ ... ture=en-CA And if one goes back to 2001, one will see significantly higher annual distributions. A senior holding 1000 units for the last 15 years will have seen a very significant reduction in cash flow income. This obviously has nothing to do with Total Return or Distribution yield in any given year....but has everything to do with distribution income. XSB shows a similar trend http://cart.morningstar.ca/Quicktakes/S ... ture=en-CA

You are right that we do not know when distribution declines will be 'arrested'. The absolute rate of decline is decreasing as one would expect but I don't know when it will end.....at least some years hence.
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Re: Historical 5 Yr GICs

Post by longinvest » 10 Jun 2017 13:48

AltaRed wrote:
10 Jun 2017 12:05
This obviously has nothing to do with Total Return or Distribution yield in any given year.
What matters to me is total return*. Everything else is mostly noise (except for some fiscal consequences).

* Actually, I contradict this, in the last paragraph of this post.

Also, I do not use nominal bonds in isolation, in my portfolio; they take part into the rebalancing of the portfolio. In the last little while, VXC has been going up faster than the other 3 assets in my portfolio. As a consequence, my new investments are partly going into VAB, which will increase the number of units I possess and affect the absolute amount of distributions I get from my VAB holding.

Each of the four ETFs I hold is complex. Combining them into a single rebalanced portfolio creates an even more complex investment; nobody can predict its future returns.

So, what matters, really, is not future returns; it is to have accumulation and decumulation plans that deal with the uncertainty of future returns. My accumulation plan is to save reasonably and invest into my 4-asset rebalanced portfolio, taking advantage of tax-sheltered accounts (RRSP and TFSA). My decumulation plan is to combine non-portfolio guaranteed lifelong base income (e.g. QPP, OAS, pension) with variable percentage withdrawals (VPW) from the same rebalanced portfolio.
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Re: Historical 5 Yr GICs

Post by AltaRed » 10 Jun 2017 14:30

I agree with what you say and what you plan to do for yourself, especially in accumulation mode. TR is ultimately the key measure in a long term portfolio as I have repeatedly said many times.

That said, surely you can acknowledge a real life example of the perceptions of a senior with X units of XSB that has not had to touch the capital of XSB...so far, primarily because other income AND the performance of equities the past several years has not required the disposal of any XSB uints. For that senior who has been 'booking' and spending the distributions monthly, that senior has seen a sustantial decrease in cash flow income from that asset from between say 2005 and today.

If that senior also looks at the unit price of XSB over the last 10 years, she would be happy from 2007 to the early part of 2010, and generally concerned since that time (unit price moving from circa $29.40 to about $28 today). People in withdrawal mode care (more) about relatively short term effects when they are pulling money out. The good news is distributions will eventually increase when the yield curve changes.....with some staying power. I just can't tell that senior how much lower it will drop before it begins to increase again. Neither can you.
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Re: Historical 5 Yr GICs

Post by longinvest » 10 Jun 2017 14:57

AltaRed wrote:
10 Jun 2017 14:30
I agree with what you say and what you plan to do for yourself, especially in accumulation mode. TR is ultimately the key measure in a long term portfolio as I have repeatedly said many times.
Why especially in accumulation mode? I don't see why decumulation should be handled differently. If one is seeking perfectly predictable lifelong cash flows, there's annuities for that. If one is seeking perfectly predictable cash flows over a fixed 5-year period with return of capital at maturity, there's GICs for that.

As for investing into bond ETFs, one should not do this to expect fixed cash flows or fixed capital value. Shorter-term bond ETFs will provide more stable capital value than longer-term bond ETFs, but none of these ETFs provide any guarantee.
AltaRed wrote:
10 Jun 2017 14:30
That said, surely you can acknowledge a real life example of the perceptions of a senior with X units of XSB that has not had to touch the capital of XSB...so far, primarily because other income AND the performance of equities the past several years has not required the disposal of any XSB uints. For that senior who has been 'booking' and spending the distributions monthly, that senior has seen a sustantial decrease in cash flow income from that asset from between say 2005 and today.
Yes, I acknowledge that the distributions of XSB and XBB have been going down, on a single unit basis, and even that they are likely to continue going down for some time if the yield curve stays relatively stable.

But, I don't want to put the emphasis on this, because I think that it is the wrong way to look at a portfolio. I do not equate senior with "unable to rebalance one's portfolio". As long as our senior investor rebalances his portfolio, he is pretty likely (currently) to see his XBB or XSB total distributions going up, because of new units bought with the proceeds of selling US stocks on fire.
AltaRed wrote:
10 Jun 2017 14:30
People in withdrawal mode care (more) about relatively short term effects when they are pulling money out.
As I said, what is most important is the plan. People in withdrawal mode should make sure to have enough non-portfolio lifelong guaranteed base income unaffected by yield curves and stock markets. A good way to increase this is to simply delay CPP and OAS to age 70. As for portfolio withdrawals and management, it can be done by simply taking one withdrawal per year and rebalancing at the same time.

I think that distribution-only-based withdrawals are terribly inefficient; they can lead to possibly starving for someone 100% invested into nominal bonds, or to possibly dying as the richest person in the graveyard for someone invested 100% into equities. A mixed stock/bond portfolio is likely to fall out of balance over time.

Choosing a workable plan, in the first place, is the sensible thing to do, even for senior investors.

Added: For those unable to rebalance their portfolio and deal with ETF transactions, Tangerine offers very easy-to-use index mutual funds. The Tangerine Balanced Income Portfolio (INI210) would be a simple, not too expensive solution (MER 1.07%)*.

* It is still way too expensive, in my opinion, for someone able to DIY manage a 3 or 4-ETF portfolio. In the U.S., Vanguard offers such balanced mutual funds with management fees below 0.20%.
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Re: Historical 5 Yr GICs

Post by AltaRed » 10 Jun 2017 15:39

longinvest wrote:
10 Jun 2017 14:57
Tangerine offers very easy-to-use index mutual funds. The Tangerine Balanced Income Portfolio (INI210) would be a simple, not too expensive solution (MER 1.07%)*.

* It is still way too expensive, in my opinion, for someone able to DIY manage a 3 or 4-ETF portfolio. In the U.S., Vanguard offers such balanced mutual funds with management fees below 0.20%.
And Mawer104 is 0.94% :thumbsup:

FWIW, lots of investors cannot handle DIY. Hence the value of Tangerine/Mawer/Steadyhand/Leith Wheeler. FWIW, our debate is meaningless for a large percentage of investors, especially seniors.
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Re: Historical 5 Yr GICs

Post by BRIAN5000 » 10 Jun 2017 16:01

FWIW, our debate is meaningless for a large percentage of investors, especially seniors.
but maybe not for the seniors on this board?
Choosing a workable plan, in the first place, is the sensible thing to do, even for senior investors.
Variable income in retirement is surely not my goal I'm not interested in cutting back on necessities or luxuries. I want to increase spending till I can't find anything to spend on.
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