The Canada Revenue Agency (CRA) released its latest Canada Pension Plan (CPP) payout number for 2024. If you are 65 years of age, you can get a maximum payout of $1,364.60. While it did not release its average CPP payout, we can make an educated guess that your average monthly payout will be around $485 if you decide to retire at age 60. The number is not exciting at all and makes you wonder if it can take care of your bills.
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Arriving at the $485 average CPP payout
In October 2023, the average monthly CPP payout was $758.32 for someone who claims the benefit at 65. The CRA reduces your payout by 0.6% for every month you prepone your claim. A 0.6% reduction for 60 months brings the total reduction to 36%. You will only receive 64% of the average CPP payout at age 60. The CPP payout increases with inflation but doesn’t decrease. It means you will at least get a $485 CPP payout and probably higher after adjusting for inflation.
Is the average CPP payout at age 60 enough to retire?
Considering that a person needs at least $1,000 per month to make ends meet, less than half the amount is difficult to imagine living with. While the figure of $485 makes taking CPP at 60 look like a poor financial decision, it is sometimes the best alternative. Suppose the person is suffering from a terminal illness or is in a critical condition. He needs the money now. There will be no later. In such situations, the best decision is to claim the CPP.
Hence, when deciding on claiming the CPP benefit, see how urgently you need the money. The CPP payout you decide to take will stay with you till the last breath, no matter how long you live. It will grow every year in January alongside inflation.
Preparing to retire at age 60 through RRSP
You cannot survive with just a $485 monthly payout. Hence, the CRA provides you with various alternatives. You can prepare your retirement savings in a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), wherein you can grow your investments tax-free. What does this mean?
Suppose you invest $1,000 in a growth stock and sell it for $5,000; you would realize a capital gain of $4,000, which is taxable whether you withdraw it or not. You can only reinvest the after-tax amount. But if you invested through a TFSA and an RRSP, you can reinvest the entire $5,000 into another stock or term deposit without paying any tax. In an RRSP, you only pay tax when you withdraw. You pay no tax on withdrawal in TFSA.
You can make the most of the two accounts to retire at age 60. Use your RRSP to invest in dividend stocks so that you can withdraw your dividends and supplement your CPP while keeping your taxable income in check. Right now, Enbridge (TSX:ENB) is at a sweet spot with a 7.88% dividend yield. The stock price is trading at the lower range as oil prices fell and high interest rates kept companies with significant debt in a bearish mode.
Nevertheless, Enbridge’s low-risk business model can sustain its $3.66 dividend per share for another decade or more. It could also grow its dividend by 3% every year for another decade. Assuming you invest $5,000 every year in Enbridge for the next 10 years and buy shares at $55, you could grow your annual dividend from $389 to $4,400. And if you buy shares at a lower price, your dividend amount will enhance.
Using TFSA for an early retirement
RRSP is a good account to consider for a monthly payout. TFSA is a good account to accumulate emergency funds and a large amount, as you can withdraw it tax-free. You could consider investing in growth stocks like Nuvei or Constellation Software through TFSA, which can grow capital.
