One of the hardest decisions Canadians edging closer to retirement face is when to retire. This one choice can mean the difference between having just enough to retire and seriously struggling. That’s especially true when it comes to your Canada Pension Plan (CPP).
Canadians pay in their CPP every paycheque, and there are many employees who match these payments. That doesn’t mean that you’re getting free money from the government, it means your CPP is coming from your own earnings. And these payments will be increasing in 2021. In fact, between 2019 and 2023 these payments are set to increase by over 5%! So that’s not exactly free passive income that you can look forward to.
So, clearly, you want to make the most of that income. So here is one amazing trick to consider when deciding when to retire.
Choose the age wisely
You can start taking out from your CPP starting at age 60. However, there is a huge difference if you decide to wait and collect CPP until 70. If you’re able to wait, your payments will increase by a whopping 8.4%, to a maximum of $1,175.83 per month for 2020. That’s a total of $14,109.96 per year!
Now here’s the issue. Let’s say you can wait until 70, does that necessarily mean you have to wait to retire? While you do have to wait to collect CPP, that doesn’t mean you have to retire at that age. In fact, $14,000 isn’t exactly a make or break when it comes to your retirement. That is certainly not enough to live on. Even if you take into consideration your Old Age Security (OAS).
No clawbacks please!
This leads to trick number two. Make sure you avoid OAS clawbacks. These are a recovery tax by the Canada Revenue Agency (CRA) for those that make over a certain amount each year. For this year, if you make above $77,580, for every dollar you must pay back $0.15. This happens to a maximum of $126,058, when the OAS payments would be null from your payments.
So if you’re able to keep your earnings below $77,580, your payments come in at the maximum amount of $614.14 per month, or $7,369.68 per year. So now, you have a total income of $21,479.64. Yet again, that’s not exactly enough to live on. And how exactly are you going to keep your payments lower?
Final trick!
Use your Tax-Free Savings Account (TFSA) to your advantage! Put away the maximum contribution every year, and all returns are tax free. It’s also better than your Registered Retirement Savings Plan (RRSP), where you can take out cash any time you want, tax free.
That’s not to say you shouldn’t use your RRSP, however. If you maximize your contributions coming closer to retirement, you can bring down your annual income. This can be the difference between $78,000 and $76,000 per year, and suddenly you receive the maximum amount from OAS!
Then, make sure you’re investing in strong passive income stocks. This is the real key. It doesn’t have to be risky. You can invest in a bank stock like Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) that offers the highest dividend yield of the Big Six Banks. As a Canadian bank, it’s likely to survive for the decades you’ll need retirement income.
If you were to use your TFSA and invest $40,000 into CIBC, you could then bring in an extra $2,104 in annual passive income from CIBC. And you’ll continue to see solid returns from this bank for years to come, all tax free if saved in your TFSA!
