Did you know that CPP benefits are set to increase?
It’s true!
People who are not yet retired will see an increase in their CPP benefits when they retire, thanks to a program called CPP Enhancement. CPP enhancement aims to increase the percentage of a person’s income replaced by CPP from 25% to 33%. If successful, it will make life easier for Canadians who are currently working and paying CPP premiums. In this article, I will explore how CPP enhancement works and how you can get a piece of the action even if you’re near retirement age.
How CPP enhancement works
CPP enhancement works by increasing the amount that people pay into CPP, thus increasing the pool of investments backing the program. The CPP is funded by a combination of stocks, bonds, real estate, and private equity. The more invested in these assets, the more the pension fund should be able to pay out in the future.
CPP Enhancement comes in two phases:
- Premiums gradually increase from 5.1% of income to 5.9% over the course of five years.
- The maximum pensionable earnings increase over the course of two years. By 2025, it’s estimated that Canadians will pay CPP premiums on up to $81,800 in income.
These two factors should considerably increase the money going into the CPP fund. If the investments do well, then the CPP Investment Board should be able to deliver the promised increase in benefits.
How you can get a piece of the action even if you’re near retirement age
If you’re already retired, then you can’t enjoy the benefits of CPP enhancement. However, if you’re 59, you will likely see some small benefit as a result of having paid ‘enhanced’ premiums over the last five years. Additionally, you can boost your CPP benefits by waiting another 5 to 10 years to retire. If you do so, then you will be paying enhanced premiums for a few extra years, which will likely increase your ultimate benefits.
Don’t want to wait? Invest instead
If you don’t want to wait another five years to retire, you can’t increase your CPP benefits. However, you can supplement them by investing in an RRSP or TFSA. RRSPs and TFSAs are tax-deferred/tax-sheltered accounts that protect your money from the CRA. Because you don’t pay any tax while your investments are in these accounts, you boost your holding period return. RRSP investments do become taxable when you go to withdraw the money, but on the other hand, they provide a tax break when you contribute.
One stock that might be worth holding in your RRSP or TFSA is The Toronto-Dominion Bank (TSX:TD). TD Bank is a Canadian bank stock that trades at 9.5 times earnings and 1.4 times book value. That’s relatively cheap for a stock these days. Despite being cheap, TD Bank has been growing. Over the last five years, it has grown its revenue at 7% per year, and its earnings by about the same annualized rate. So, this isn’t a stock that’s cheap because the underlying company is going nowhere.
TD Bank is one of the best-run banks in Canada. It has a 16.2% CET1 ratio, which means that it has more than enough capital to handle the risks it faces. It is expanding, having recently closed a billion-dollar deal to buy the U.S. investment bank Cowen. On the whole, it’s a great investment to hold in your RRSP or TFSA to save for retirement.
