The amount of Canada Pension Plan (CPP) benefits you get in retirement depends partly on how much you have contributed over the years. As published by Mountain View Today, “The amount of CPP benefit is based on how much you contributed during your working years. To maximize this amount, make contributions for a minimum of 39 years between [age] 18 and 65 — and also contribute the maximum allowable amount for 39 years.”
This year, the maximum CPP contribution for self-employed Canadians is $7,508.90, based on maximum annual pensionable earnings of $66,600. The Canada Revenue Agency (CRA) sets the maximum CPP contribution amount each year. This amount increased from $4,712.40 to $7,508.90 (4.8% per year or a total of about 59%) over the last 10 years.
If you are an employee, you’ll pay half of that amount, while your employer pays the other half of $3,754.45. So, if you earn less than the maximum annual pensionable earnings (and therefore don’t make the maximum CPP contribution) or don’t contribute the full amount for at least 39 years when you receive your CPP benefits, it won’t be the maximum receivable amount.
You can delay receiving your CPP benefits to get a higher payment
According to RBC, the standard age to start taking CPP benefits is 65. However, you can start taking it as early as your 60th birthday or as late as 70. Retirees take it early because they need the supplementary income or for health reasons (such as if their life expectancy is short because of health issues based on family history.)
RBC wrote, “If you start CPP benefits before age 65, your CPP is permanently reduced by 0.6% for each month you receive it before age 65, including the month you turn 65 (a reduction of 7.2% per year) … If you start receiving a CPP retirement pension after age 65, your monthly CPP payments will permanently increase by 0.7% for each month you delay — up to a maximum increase of 42%, which you reach by age 70.” Your decision on when to start taking CPP would largely be based on your health outlook, life expectancy, and whether you need the income.
Optimizing your TFSA returns
Your CPP pension makes up a piece of your retirement income. Your Tax-Free Savings Account (TFSA) could make up an even bigger part of that income. When you’re still working, you could take greater risk to target higher long-term investment returns by investing in a diversified basket of quality stocks.
Quality stock example
A top utility stock you can buy and hold to support you on your journey to financial freedom is Brookfield Infrastructure Partners (TSX:BIP.UN). It owns and operates a growing, diversified global portfolio of quality infrastructure assets, including rail operations, regulated or contracted utilities, energy infrastructure, data centres, and even a couple of semiconductor manufacturing foundries, which generate rising cash flows.
Not only does it offer a decent cash-distribution yield of 4.3%, but its total-return potential is also respectable. It targets returns of 12-15% on its investments, which can help drive its target cash distribution growth of 5-9% per year.
Brookfield Infrastructure’s track record of cash-distribution growth is good. Since it was spun off from its parent company in 2008, it has been increasing its cash distribution every year. For reference, its five-year cash-distribution growth rate is 6.6%. Analysts believe the stock trades at a discount of about 17% at $46.37 per unit.