CPP money is rarely enough for Canadians to live off of in retirement. The average payout for a person taking CPP at age 65 is $760 per month. The maximums are around $1,300 per month taking benefits at 65, and $1,855 a month taking benefits at 70. If you take CPP at 70, your benefits might cover rent in smaller cities. CPP alone won’t cover all of a person’s expenses anywhere.
Some Canadians can make up for low CPP payouts with employer sponsored pension plans. Defined benefit (DB) plans have fixed payouts, though, so they lose inflation-adjusted value over the beneficiary’s life. For a person with a very long life expectancy, relying on just a DB plan and CPP might not be the best idea.
Realistically, you’ll want to supplement your government and employer sponsored pensions with investments. With retirement accounts like RRSPs and TFSAs, you can build a miniature “pension plan” of your own, and possibly cover all of your retirement expenses.
How much money you need to live off of in retirement
According to Spring Financial, the average Canadian has $1,708 per month in rent plus $736 per month in other living expenses. That brings total expenses to $2,444 per month. There is no possible CPP payout that can cover $2,444 in monthly expenses. CPP and OAS combined just barely cover it, if you take CPP at 70 and get the maximum monthly benefit. However, that requires waiting through your sixties, and having earned the maximum pensionable amount for many years. Not very many people actually collect a $1,855 per month CPP cheque in practice.
CPP benefits are taxable just like any other form of income. A $1,855 monthly CPP cheque produces a $22,260 annual income. Taxes on $22,260 are negligible, as the first $15,000 isn’t taxable, and the next $15,000 to $53,000 is taxed at only 15% federally. The provincial taxes on such levels of income vary. For example, amounts between $15,000 and $51,466 are taxed at 5% in Ontario. Realistically, a person earning $22,260 in CPP will probably pay just $1,000 in taxes, if that.
Even still, that’s enough to diminish the feasibility of covering $2,444 in expenses with CPP and OAS. The maximum OAS payment is $713 per month. Add that to the maximum CPP cheque and you’re at $2,568 per month. That’s $30,816 per year. Apply a 20% tax to the $15,816 that’s taxable and you get a $3,163 tax bill. Take that off the $30,816 pre-tax amount and you’re at $27,653. Divide by 12 and you’re at $2,308 per month. About $136 short of what you’d need to cover $2,444 in living expenses.
What to do if you aren’t getting enough CPP money
If you aren’t getting enough CPP money, you’ll need to save money, and invest it in stocks, bonds, and index funds. You’ll need a diversified portfolio of these – investing all of your money in just one stock is very risky.
If you’re looking for a starting point in building a short list of stocks you want to invest in, you could consider Brookfield Asset Management (TSX:BAM). It’s a major asset manager that manages funds for investors. Its funds are popular all over the world, especially in the United States, where BAM is every bit as respected as the country’s own top financials. BAM is extremely profitable, with a 50% net margin (meaning that half of every dollar of revenue turns into profit). It also pays a dividend that yields 3.18%. So, you can collect income from the stock without having to worry about timing share sales.
In general, beginner investors are advised to invest in diversified portfolios of stocks and bonds. The Motley Fool recommends at least 25 stocks, while others recommend investing in ultra-diversified portfolios in the form of index funds. Those often have hundreds of stocks. You can’t go putting 100% of your money in BAM, but it’s a starting point.
