When it comes to Canada Pension Plan (CPP) benefits, most soon-to-be retired Canadians know the dilemma.
If you retire at 60, you won’t get much. But if you wait until 65 or later, you’ll most likely have to keep working. It’s possible to take CPP without quitting your job, but if “retirement” to you means literally ceasing working, then you may have to wait until later than 60 to do that.
CPP doesn’t pay very much if you retire early. The average amount that Canadian retirees get is $811 per month — not even enough to cover rent in Toronto. You can certainly boost your CPP by waiting. But unless you have a lot of investments, it will be tough.
Fortunately, you do not need to have that much saved in order to retire on time. As long as you have a few hundred thousand dollars, you can likely earn enough dividend/interest income to supplement your CPP benefits, so you can retire comfortably.
How your CPP benefits are calculated
Your CPP benefits are a function of two things:
- How long you worked. The earliest you can take CPP at is 60. The latest you can delay taking benefits to is 70. The longer you wait, the more you get. You get an extra 0.2% per year for each year you delay from 60 to 65.
- How much money you earned when you worked. Your CPP benefits are based on your CPP premiums. The more you pay in, the more you get out, up to a maximum called “maximum pensionable earnings.” After you breach the maximum pensionable earnings threshold, you pay no further premiums. Currently, the threshold is $66,600. It will be going up to over $81,000 in the second phase of CPP enhancement.
So, the longer you work, and the more money you make (up to a limit), the more CPP benefits you get.
Why you most likely have to delay retirement to boost your CPP benefits
Realistically, you have to delay retirement if you want to boost your CPP benefits. “Make more money” is not viable advice for the majority of people. Some employers offer overtime, but many don’t. And as far as promotions and raises go: that’s a topic for entire books, not one article on a tangentially related topic.
What kinds of investments are best?
If you want to supplement your CPP by investing money rather than waiting another decade or so to retire, you’ll need to know what kinds of investments are best. As I’ve said in previous articles, index funds are best for absolute beginners.
If you’re experienced enough to invest in individual stocks, you may wish to look into dividend stocks, as they provide regular cash flows. Consider Alimentation Couche-Tard (TSX:ATD), for example. It’s a gas station company that has a 0.78% dividend yield. That’s not the highest yield around, but it has been growing rapidly over time. For example, last year, ATD’s management hiked the dividend by 28%. Over the years, ATD’s revenue and earnings have consistently gone up. As long as management remains disciplined about its spending, that trend should continue well into the future.
