The Canada Pension Plan (CPP) pegs the retirement age at 65, although you have the option to receive it early at 60 or defer until 70. The decision, however, rests with the would-be retiree. If you’re nearing the retirement phase, it would be best to review the options carefully.
Not everyone looks forward to late retirement. You might miss fulfilling things in your bucket list and other post-retirement goals. Likewise, there are compelling reasons to not to delay the CPP until 70. It will depend on your circumstance and the level of confidence.
Health is a primary consideration when timing your retirement. The general tendency of people with health issues is to be able to maximize the CPP payment within their lifetime. The risk with this option is that CPP payment reduces by 7.2% per year, or 36% overall, if you claim it at age 60.
The bright spot here is that you will collect five years longer than someone who will elect to defer the CPP until 70. In the delay option, the incentive is a higher CPP. Your payment will increase by 8.4% for every year of delay or 42% total for five years. Some retirees taking this option might also have urgent financial needs.
Pensions are enough
Affordability is the big question mark for someone due for retirement. The annual pension you will receive from the CPP plus the Old Age Security (OAS) is $15,436.80. The computation of pension amounts is based on actuarial studies.
Thus, the CPP and OAS combined should cover your basic needs in the course of your retirement. If you are prepared to scale down your lifestyle and subsist on $1,286.40 monthly, retire at 65.
In most cases, people who have saved early for retirement and built enough of a nest egg will not delay retirement. Wealth spells the difference when you’re setting a retirement date. You’re not in danger of outliving your retirement funds, because you have investment income and a pension for sustenance.
If you’re still in the process of growing your nest egg, include a blue-chip stock like Toronto Dominion Bank (TSX:TD)(NYSE:TD) in your investment portfolio. The income from this Dividend Aristocrat can be for life, just like the CPP.
Since this bank stock is 15.6% off its 2019 year-end price of $71.15, you’re getting an excellent deal. If you have $200,000 worth of TD shares, your annual income would be $10,300, or $25,736.80 in total, if you were to include the CPP and OAS pensions.
This $108.3 billion bank reported a 52% drop in net income for Q2 fiscal 2020 (quarter ended April 30, 2020) due to the $633 million increase in loan-loss provision from the previous year. All the Big Five banks made this move as a precaution. TD assures investors that it can weather the unprecedented economic environment.
Time is the most valuable asset of any retiree. Don’t rush to retire if you’re ill-prepared. However, you should be ready and able to call it quits at the ideal age of 65. Age 70 shouldn’t be an option, or you might be too old to enjoy the sunset years.
Speaking of not delaying the CPP...
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.