Did you know that Canada Pension Plan (CPP) benefits are set to grow?
Thanks to a program called CPP Enhancement, the average Canadian who pays into CPP now will see higher benefits in the future.
You don’t get the benefit of CPP enhancement if you retired long ago, but you do if you are set to retire in the future. In this article, I will explore how to maximize your CPP benefits and supplement them with a Tax-Free Savings Account (TFSA).
Step one: Consider working some overtime
Your CPP benefits are a function of two things:
- How long you’ve worked for.
- How much money you made when you worked.
CPP premiums are taken from every dollar of income up to a certain limit, known as maximum pensionable earnings. Currently, the maximum pensionable earnings limit is $66,000. If you make less than $66,000, then you are not paying as much into CPP as you could be. Accordingly, your benefits will be lower than if you’d earned $66,000.
Is there a way around this?
To a limited extent, yes. You can’t go back in time and make more money in earlier years of your career, but you can work more hours in hopes of hitting the maximum pensionable earnings limit in the years you have left. This will boost the amount of CPP you can ultimately collect when you retire.
Step two: Delay retirement as long as you can
After you’ve committed to maximizing your earnings, it’s time to work as long as possible. You gain an extra 0.2% in CPP benefits per year for each year you delay retirement from 60 to 65. You get an extra 0.3% per year for each year from 65 to 70. It makes a big difference. If you delay retiring all the way to age 70, you can be talking about $600 per month in extra benefits or more! So, consider delaying retirement if you can. It can result in a lot of extra CPP benefits when you finally go to retire.
Step three: Keep as high a percentage of your assets as possible in a TFSA
Now, if you read through my steps one and two and thought, “Gee, this seems like a lot of work,” you’re right. Boosting your CPP benefits is, in fact, a lot of work. Ultimately, it’s a simple matter of income earned and years worked. However, there is one way to avoid having to delay retirement to boost your CPP benefits:
Keep your assets in a TFSA.
By investing in a TFSA, you avoid paying any taxes on your stocks, funds and/or bonds. Doing things this way ensures that you enjoy as high an after-tax return as possible.
One stock you might want to consider for your TFSA is Toronto-Dominion Bank (TSX:TD). TD Bank is Canada’s second-biggest bank by market cap. Like many bank stocks, it pays a dividend and has a high yield (about 4.5%). In 2023, it’s possible to contribute up to $88,000 to a TFSA if you were 18 or older in 2009. $88,000 invested at a 4.5% yield is $3,960 per year, and that amount is tax free inside a TFSA!
As you can see, with dividend stocks like TD Bank and a TFSA, you can generate a lot of income — potentially enough that you won’t have to work until 70 in hopes of boosting your CPP benefits.
