Are you hoping to retire and maintain the same lifestyle you have today? If you are but will rely only on your Canada Pension Plan (CPP), you won’t nail it. Retirement experts say you must have between 70% and 100% of your current income to cover all your financial needs in the post-work years.
The Canada Pension Plan Investment Board (CPPIB) reminds CPP users that the contributory social insurance program is a foundation in retirement. Its design is not to replace all your income in the working years. Furthermore, the CPP fund manager emphasizes that the CPP isn’t a retirement plan.
Replacement level
The message of the CPPIB is clear in that the CPP helps users, but they must save more to fill the income gap. If you have little or zero savings, it would be best to build a nest egg sooner than later. The current replacement level is 25% of the average pre-retirement income but will eventually increase 33.33% with the ongoing enhancements.
Let’s focus on the here and now to see how much you need to sock away and live comfortably in retirement. The maximum CPP monthly payout in 2021 is $1,203.75. However, most CPP users don’t qualify to receive the max. If we peg the monthly benefit at $619.68 (CPP average as of June 2021), the shortfall vis-à-vis 100% of the pre-retirement income is $1,859.04.
Building retirement wealth
Canadians will not retire penniless for sure because of the CPP and Old Age Security (OAS). You can collect the former as early as 60, while the latter is available at 65. Furthermore, future retirees can utilize the Registered Retirement Savings Plan (RRSP), Tax-Free Savings Accounts (TFSA), or both to build retirement wealth.
Dividend stocks are eligible investments in an RRSP and TFSA, and they can be your income sources in retirement apart from the CPP. Time is your friend, and therefore, you can amass a small fortune if the investment window is longer.
Income sources
Freehold Royalties (TSX: FRU) and First National (TSX: FN) are good choices on the TSX today. Freehold, a $1.62 billion oil & gas royalty company, pays a 6.67% dividend, while the yield of the $2.43 billion non-bank mortgage originator and underwriter is 5.79%. If the objective is to supplement the CPP and produce $1,859.04 every month, you must accumulate $179,100 worth of shares in each dividend stock.
This year, Freehold’s stock performance is exceptional, as evidenced by its 122.08% gain ($11.04 per share). In the nine months ended September 30, 2021, net income was $40.9 million versus the $14.3 million net loss in the same period last year. Its funds from operations increased 138% to $120.8 million year over year.
In Q3 2021, First National reported a 4.3% increase in mortgages under administration (AUM) versus Q3 2020. The $122.3 billion AUM is a record for the company. Likewise, mortgage originations increased 10% year over year. According to management, First National benefits from Canada’s robust real estate market and a substantial share of the mortgage broker channel. The stock trades at $41.20 per share.
Secure your financial future
Heed CPPIB’s gentle reminder that the pension isn’t a retirement plan. Thus, it’s up to retirees to secure their financial future.
