Commencing receipt of the Canada Pension Plan (CPP) isn’t an easy decision for pensioners. Most ask which is a more valid strategy, starting payments at age 60 or at 65? Some in excellent health will even delay it for another five years to receive higher payouts. Still, it would be best to make a few assumptions to reduce the chances of running out of money in retirement.
Unreduced pension
I want like to think the CPP pegs the standard age at 65 because it’s the optimal time to apply for the pension. The yearly average amount is $8,270.04 (as of October 2020) if you’re 65 and starting the payments today. Thus, you can expect to receive $689.17 per month. A CPP user who has contributed “enough” for 39 years can qualify to receive the maximum benefit of $1,203.75 per month or $14,445 annually.
Since the Old Age Security (OAS) kicks in at 65, the core retirement income bumps up if you claim both simultaneously. For the first quarter of 2021, the maximum monthly OAS benefit is $615.37. Therefore, you would get an annual guaranteed income of $15,654.48 for life.
Reduced payment
It’s a good thing that the CPP is flexible, and you can draw the benefit as early as 60. While this option attracts soon-to-be retirees with health concerns or urgent financial needs, the stipend is lower. You risk losing up to 36% of your pension permanently as the amount reduces by 0.6% per month before 65. The annual amount becomes $5,292.83 instead of $8,270.04.
However, if you start payments at 60, you will collect five years longer than someone claiming at 65. The break-even point here is around 106.7 months. A 65-year-old claimant pulls ahead or gets higher pension overall after 74 years old. Unfortunately, either option leaves a wide income gap.
Retire wealthier
The timing decision to claim the CPP is important, although it mostly depends on your actual financial situation. You’ll have the confidence to take the retirement exit or retire wealthier if you have other income sources to bank on besides the CPP (and OAS).
A telecom giant like BCE (TSX: BCE)(NYSE: BCE) is among the best income sources in the current setting. Since connectivity is crucial, telecommunication services and the Internet are must-haves. BCE’s business should endure or outlast any economic downturns. Retirees need recession-proof investments that can provide recurring, uninterrupted cash inflows.
BCE shares trade at $54.24 per share and pay a lucrative 6.01 dividend. A $150,000 investment will produce $9,015 in annual income, which is higher than the average yearly CPP pension at 65. Similarly, a pensioner at 60 increases his or her retirement income by the same amount.
Notwithstanding the extreme challenges last year, BCE proved its resiliency once more. CPP users, young and old alike, should note that the telco stock has increased dividends by almost 30% in the last five years. With subscribers growing in number yearly, expect further dividend growth down the road.
Most popular option
Interestingly, the early option is the most popular among Canadians. The standard age (65) is the second-best choice. Only 1% of CPP users choose to delay the payments until 70. But either way, you need other income sources to enjoy a comfortable retirement.
