1 Powerful Inflation Hedge Available to Retiring Canadians

Retiring Canadians gain an inflation hedge by deferring their CPP and OAS pension payments until age 70.

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Inflation diminishes buying power. For seniors, the impact on retirement dollars is significant, regardless of the rate. Since many retirees spend on ever-increasing costs of health care, it’s important for future retirees to prepare or have some protection.

If the inflation rate is 6%, your dollar would be worth 94 cents in one year. Today, the Bank of Canada is working to control rising inflation. The central bank began its rate-hike campaign in early March and is likely to be more aggressive in succeeding hikes.

Fortunately for retiring Canadians, there’s a powerful inflation hedge available to them. If you’re in excellent health, consider deferring your Canada Pension Plan (CPP) and Old Age Security (OAS) pensions until age 70.

The incentive for deferring the payments means higher pension payments for life. But if finances allow, boost your retirement income further by investing in reliable dividend stocks like Manulife (TSX:MFC)(NYSE:MFC) and the North West Company (TSX:NWC).

Deferral options

The CPP pegs the standard retirement age at 65. Users can start payments as early as 60, although the pension amount decreases permanently by 36%. However, the incentive for delaying the payments until 70 enhances the benefit by 42% (8.4% per year after 65).

Meanwhile, the OAS is available at 65, not earlier. Like the CPP, deferring the government-sponsored benefit is also an option. The increase in pension for every month of delay past 65 is 0.6%. On an annual basis, the bump is 7.2% or 36% total if you elect to start payments at 70.

Third income sources

If you worry about outliving your retirement savings, the solution is to invest for the long term. Your capital will remain intact, while the dividends can supplement your CPP and OAS pensions. Manulife and North West Company are excellent sources of income. Besides the attractive dividends, the payouts should be safe and sustainable for years.

Manulife is a household name in Canada and globally. The $51.78 billion insurer and financial services provider has a dividend growth streak of eight consecutive years. Current investors are up 12.29% year-to-date. At $26.74 per share, you can partake of the 4.94% dividend.

In 2021, Manulife reported a 21% increase in net income to $7.1 billion versus 2020. President & CEO Roy Gori said, “Our ability to adapt and serve clients across the globe who are navigating a very uncertain environment continues to drive our operating results with record net income of $7.1 billion.”

North West in the grocery stores industry provides essential products and services. The $1.82 billion company is 354 years old and serves far-flung rural communities and urban neighbourhood. Besides Canada, the captured markets are in Alaska, the South Pacific, and the Caribbean.

The average net income in the last three years is $103 million. Based on the current run-rate, North West is on track to generate $152 million in profits in 2022. The current share price is $38.02, while the dividend offer is a decent 3.89%.

Indexed to inflation

Deferring the CPP and OAS pensions is a great option for retiring Canadians if there are no health issues or urgent financial needs. Since both are indexed to inflation, you have a powerful inflation hedge at age 70.       

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends THE NORTH WEST COMPANY INC.

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