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Retirees: Should You Worry About the CPP Pay Cut?

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Last month, the Canada Revenue Agency (CRA) announced another pay cut would be coming to your employment earnings. There were a lot of worried people out there wanting every penny they can have in their own pockets, and rightly so.

However, there is a method to this madness. So let’s review the true costs and benefits of the Canada Pension Plan (CPP) and the recent enhancement program.

The new CPP program

The CPP enhancement program was announced back in 2019. Before then, the goal was to have one quarter of your average earnings available each year upon retirement.

But as of 2019, that’s been upped to one third of your average earnings. Of course, this isn’t going to magically happen and is going to take an increase in CPP payments.

If you’re employed, you and your employer both contribute to your CPP payments. Between 2019 and 2023, those payments will increase from 5.1% in 2019 to 5.95% by 2023. If you’re self-employed, those payments will increase from 10.2% to 11.9%.

From then on, there will be a second earnings ceiling introduced. As of now, if you make above an earnings limit, in 2019 it was $57,400, you can only contribute up to a maximum of $2,748,90 if employed, and $5,497.40 if self employed.

But this is going to change as of 2024 and 2025. You will still have the first earnings ceiling, but the second earnings ceiling will mean you will still contribute to your CPP, but at a lower rate, estimated to be at 8% as of writing.

So… good or bad news?

On the one hand, no, you won’t have all that cash available to spend or invest in other things. On the face of it, it’s absolutely money out of your pocket.

However, the goal is to save you from yourself. The CPP program invests for you, so it’s something you don’t have to worry about. All you have to do is collect that cash when it’s time to retire.

In fact, if you time it well and wait until age 70, you can increase your CPP payments by 8.4% each year! So now you’ve put all your hard-earned money to work, and can use it to pay for your retirement — or at least one third of the annual salary you were used to while working.

What about my money?

If you really want that money back, the best thing you can do for yourself is to invest. Don’t complain about CPP, look forward to it! Instead, find strong stocks that provide solid dividends that you can use to supplement the cash you’ve lost.

Let’s say you want to reach the goal of $2,748.90 per year in dividends to make up for your earnings limit. That’s definitely doable in today’s market.

What you want are strong dividend companies with a solid future ahead. One company to consider is NorthWest Healthcare Properties REIT (TSX:NWH.UN).

The healthcare industry is bolstered by the COVID-19 outbreak, but NorthWest is a strong company that will continue to be around for decades. That’s because it has a diverse range of healthcare properties around the world to continue bringing in strong revenue.

Healthcare will also likely see continued investment to prevent another pandemic like this year’s. So expect great revenue, and thus returns, from this company.

Meanwhile, NorthWest offers a solid 6.37% dividend yield as of writing. To reach that $2,748.90 in annual dividends, you would have to make an investment of about $43,300 as of writing, which can all be done in a Tax-Free Savings Account (TFSA)!

You now have tax-free returns, you’ve replaced your CPP payments, and it’s all smooth sailing toward retirement. That wasn’t so bad, was it?

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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 Amy Legate-Wolfe owns shares of NORTHWEST HEALTHCARE PPTYS REIT UNITS. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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