Canada’s economy is on the rebound, notwithstanding the battle against the new COVID-19 variants. The gloom and doom atmosphere seems to have lessened with the ongoing vaccination campaign of the federal government. Still, the situation is worrisome for soon-to-be retirees.
Retirement planning has never been more critical, given the uncertainties brought by the global pandemic. If you are on the cusp of retirement, the Canada Pension Plan (CPP) and Old Age Security (OAS) are your foundations. Assuming you start the pension payments at 65, will the combined monthly pension of $1,238.20 be enough for you in retirement?
Standard pension payments
The CPP sets the standard retirement age at 65, although you can start payments when it becomes available at 60. If you stick to 65, the average monthly amount is $619.75 (January 2021). The early option is ideal if you have an urgent need for income or if poor health is considered. However, the pension reduces permanently by 36%.
The OAS is only available at 65, and the maximum monthly payment amount is $618.45 (January to June 2021). By combining the benefits, you can expect a total of $1,238.20 every month, more or less. Some Canadians in good health can wait five years more and claim their CPP and OAS at age 70.
Increase your benefits
The incentive for the delay option is a 42% and 36% permanent increase in the CPP and OAS benefits, respectively. Instead of receiving $1,238.20, the total monthly amount increases to $1,721.14 or $20,653.64 per year. Remember, your CPP and OAS are partial replacements to the average pre-retirement income. Financial stress, in retirement, if not dislocation, remains a possibility whether you take both pensions at 65 or 70.
Retirees need to cope with rising costs of living and perhaps medical expenses. Therefore, it’s safer to create other income sources instead of relying solely on your CPP and OAS pensions. Current retirees lament not having enough retirement savings. If you have similar concerns in the future, you have the time and ways to improve your financial well-being before you retire.
Third income source of retirees
The Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are the investment accounts most Canadians use to save for retirement. If you have either, consider maximizing the contribution limits if finances allow. Also, invest in a high-yield, pure dividend play like Pembina Pipeline (TSX: PPL)(NYSE: PBA).
The energy stock is a dividend machine with its ultra-high 6.62% dividend. A $150,000 investment will generate $9,930 in passive income. Since Pembina Pipeline pays dividends monthly, you’d have $827.50 more to add to your monthly CPP and OAS benefits. Also, if you keep reinvesting the dividends, your capital would grow to $284,759.38 in 10 years.
Pembina Pipeline, a $20.93 billion energy infrastructure company, has a large asset base, including 19 active gas-processing facilities. Its 18,000-kilometre pipeline transports nearly three million barrels of oil equivalent per day. The energy stock is among the top performers in 2021 with its 29.44% year-to-date gain. Over the last three quarters (June to December 2020), the average operating income is $1.8 billion.
Enjoy your sunset years more
It’s not entirely impossible to live on only your CPP and OAS in retirement. However, you’ll enjoy the sunset years more if you had a third reliable source like Pembina Pipeline that can deliver a lasting income stream.
