The Canada Pension Plan (CPP) and Old Age Security (OAS) are both strong programs for retirees. Yet we all only have so much cash on hand. So, when it comes to these programs, there are certainly benefits and pitfalls for each. That’s why today we’re going to consider both for Canadian investors who can then use the information and base it on their own scenario.
CPP
First, let’s go over the upsides and downsides of CPP by getting into the nitty-gritty details. To qualify for CPP, you must have worked and made contributions to the plan. Both employees and employers contribute to CPP, with self-employed individuals paying both portions. For 2023, the contribution rate is 5.95% of earnings for employees, up to the maximum pensionable earnings of $66,600, resulting in a total contribution limit of $3,754.45 per individual.
The average monthly CPP benefit in 2023 is $717.15, while the maximum monthly benefit is $1,306.57. CPP benefits increase annually based on the Consumer Price Index (CPI). You can start receiving CPP benefits as early as age 60, although the amount will be reduced. Conversely, delaying benefits until age 70 can result in a higher monthly payout. CPP benefits are considered taxable income, so you will need to factor this into your overall tax planning.
OAS
Now, let’s get into the details surrounding OAS payments. To be eligible for OAS, you must be 65 or older and have lived in Canada for at least 10 years since turning 18. Full benefits require 40 years of residency after age 18, but partial benefits are available with fewer years of residency.
The basic monthly OAS benefit in 2023 is $691.00. Additionally, low-income seniors may qualify for the Guaranteed Income Supplement (GIS). However, OAS benefits are subject to a clawback if your net income exceeds $86,912 as of 2023, with benefits completely phased out at around $141,917 as of 2023. OAS benefits are also taxable income. If you have a high retirement income, you might face OAS clawbacks, reducing your benefits.
Considerations
So, now that we know the details, let’s go over the key considerations for Canadian investors. You can start receiving CPP benefits as early as 60, with a reduction, or delay until 70, with an increase. Your decision should depend on your financial needs and life expectancy. OAS benefits typically start at 65, but you can delay them to increase the monthly benefit by 0.6% for each month you delay past 65, up to 36% at age 70.
If you have contributed significantly to CPP and want to maximize your retirement income, delaying CPP might be beneficial. For OAS, consider the residency requirements and the potential impact of OAS clawbacks if you expect a higher income during retirement.
Furthermore, since CPP benefits are fully taxable, consider your overall income and tax bracket when deciding when to start benefits. For OAS, plan for potential OAS clawbacks if your retirement income exceeds the threshold.
There are also health considerations. If you expect a longer life expectancy, delaying CPP can result in higher lifetime benefits. Similar considerations apply to OAS, but the OAS clawback might be a more significant factor if you have substantial other income sources.
Make it more
Investors can strategically use both OAS and CPP benefits to increase their investments in retirement by implementing investing. And in this case the best stock to consider is Royal Bank of Canada (TSX:RY). Royal Bank of Canada is the largest bank in Canada by market capitalization and one of the largest in the world. It offers a wide range of financial services, including personal and commercial banking, wealth management, insurance, investor services, and capital markets products.
What’s more, it has a long history of paying and increasing dividends. As of 2023, it has a dividend yield of around 4-5%, making it an attractive option for income-seeking retirees. RBC consistently reports strong financial results, driven by its diverse business model and robust revenue streams.
Plus, it is actively expanding its presence in the United States and other key markets, which can drive future growth. Altogether, it’s a strong investment to increase your CPP and OAS payments even more.
