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CPP Increase 2021: Your Paycheck Could Get Smaller Next Year

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The Canadian government is considered to be excellent at taking responsibility for caring for its citizens. The country provides excellent infrastructure, work opportunities, government-funded healthcare for Canadians, and exceptional care for Canadian retirees.

The government has introduced measures to take care of its productive citizens, even when they are no longer capable of working. Of course, the government can’t care for the entire retiree population out of its own pockets. Programs like the Canada Pension Plan (CPP) ensure that it can care for retirees.

The CPP is a pension program funded by the working population in Canada and their employers. It is a mandatory retirement savings that requires you to contribute a portion of your income until you retire. When you retire, you can receive a monthly CPP pension based on how much you contributed to the fund.

However, there are some changes being introduced to enhance the CPP that you should be aware of.

CPP updates could make your paycheck smaller in 2021

The maximum annual pensionable earnings is the ceiling at which your CPP contributions stop. You can’t contribute more money to your CPP beyond that amount, regardless of how much you earn. The ceiling changes each year, but the hike in 2021 is significantly higher.

The ceiling was raised 4.9% in 2021 compared to 3% in recent years. While the contribution rate had been the same from 2003 to 2018, the government has been increasing the contribution rate for the last three years.

Based on the updates, the maximum pensionable income is $61,600 compared to $58,700 last year. The contribution rates for employees increased to 5.45%, and their employers have to match their contributions. Self-employed individuals will have to contribute 10.9% of their revenue to match the contribution rate.

The increased contribution for your CPP could mean a lighter paycheck since 2021.

Why is the CPP update a good thing?

Many Canadians might not be too keen on the idea of taking home a lower amount through their paycheck after the increased CPP contributions. However, the CPP enhancement could prove to be fantastic for Canadians in the long run. Think of it as a straightforward way to invest in your retirement income.

The monthly CPP you earn depends on how much you contribute to the plan and for how long you make your contributions. The more you contribute right now, the better your retirement income will be. Additionally, these changes can also benefit the current retirees.

Create your own pension

Regardless of the amount you receive, the CPP is designed to cover a portion of your retirement income. You should consider creating another revenue stream to provide you with passive income during retirement. A portfolio of reliable dividend stocks like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) in your Tax-Free Savings Account (TFSA) could be ideal for this purpose.

The TFSA can be an excellent investment tool that you can use to create a secondary pension. Holding a portfolio of dividend stocks like TD means that you can continue growing your account balance without incurring taxes for as long as you remain invested. You can withdraw funds from your account tax-free.

TD could make an ideal long-term investment due to its impeccable track record for paying its shareholders. It is one of the oldest Canadian banks and has an impressive dividend-paying streak stretching over 150 years. The bank’s wide financial moat has allowed it to pay its shareholders for over a century and a half without fail.

Foolish takeaway

Buying TD shares and holding your investment in a TFSA means you can keep growing your wealth and retire a much wealthier investor. It is possible to generate enough passive income through dividends that you can defer collecting your CPP until you are 70. Delaying your CPP can help you increase your monthly pension by 42%!

I think TD could be an excellent stock to begin building a TFSA portfolio for a wealthy retirement.

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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.

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