Many people believe that the government should take care of you once you retire. While that’s a huge and separate debate, and to an extent, the government does take care of you through CPP and OAS, is that enough for you to survive? Let’s see how the numbers pan out.
CPP+OAS retirement income
On average, Canadians who start taking their CPP pensions at the age of 65 get about $680 a month. The worst-case scenario is starting your pension at 60; you will average out somewhere around $435.
If you wait till 70, you might receive an average retirement pension of $964. Let’s stick with the average and the start of the pension at 65.
An OAS payment starts at the age of 65. The maximum amount for 2020 that you can get as your OAS payment is $613.5 per month. The lowest income seniors can get a monthly OAS income of $916 for which you need to have an annual income of $28,150 or less.
So if you retire at 65, the combined monthly income you will get from your OAS and CPP benefits will amount to about $1,293. And while it’s a decent enough sum, is it enough of a sum for a retiree to live on?
According to a study, an average retiree spends about $2,611 a month of food, healthcare, housing, and taxes. This sum usually grows up as you advance in age and require more assistance or special care.
But for a healthy retiree, the retirement sum would fall somewhere around $2,600 a month. And as you can see, the combined CPP and OAS income aren’t nearly enough to cover that expense.
You can cut back on a lot of things to limit your spending, but there is only so far you limit your necessities. On top of that, if you don’t have any savings or backup funds, how will you cope with any unforeseen expenses, if you are living solely on OAS and CPP?
The solution is saving and investing. Savings alone, even with the best rates interests, might not generate enough to sustain you in your retirement years. Investing, on the other hand, can help out a lot.
Let’s say you are earned a little higher than the minimum wage throughout your life and saved a bare minimum of 10% of your yearly income. So at $35,000 a year, it will come to $3,500 a year of savings.
If you invest in three long-standing Dividend Aristocrats that that are leaders in their respective sectors, you may easily overshoot your desired monthly income of $2,611.
Canadian Utilities, Toronto-Dominion, and Enbridge are three Dividend Aristocrats, with a combined average yield of 4.6%. In 35 years, just through dividends, your combined capital can be a bit above $300,000.
If we look at growth, the prospect seems much brighter. The three companies have a 10-year CAGRs of 10.76%, 12.63% and 13.50% respectively (dividend-adjusted).
So if we take the least number of 10%, the same stocks can get you to about a million dollars in 35 years, with just $3,500 of investment a year. Even if the companies perform half as well, $500,000 and a 4% yield can earn you a monthly sum of $1666, which, combined with the CPP and OAS, can get your monthly income up to almost $2,960.
The numbers don’t always come out the same way, and every case is different. But it’s just one example of how saving a mere 10% of your income, and investing some of the most stable stocks available can get you a decent sum to retire on.
This is all thanks to the power of compounding. It can be taken as a cautionary tale, and a nudge toward start saving and investing as early as possible.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.