Millions of Canadians rely upon the Canada Pension Plan (CPP) and Old Age Security (OAS) pensions to financially sustain their golden years. But these benefits do not just magically appear as you enter your retirement years. Think of CPP as the tree you keep watering with your contributions for decades for it to bear fruit at the time of retirement. In most cases, it’s not enough to help a retiree survive financially and has to be augmented by savings.
That’s where the registered, tax-sheltered accounts like Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) come into play. They allow you to save for retirement and grow your savings through investments.
This is necessary for a number of reasons, including the disparity that exists between static CPP and the constantly rising cost of living. However, the government has taken steps to bridge that disparity by enhancing the CPP.
CPP enhancements
The government has steadily increased the contribution rates for the CPP over the last five years, and they are now at 5.95% for both employees and employers. It may sting the contributors now but will benefit them when they retire. People who have contributed at this enhanced rate for 40 years may experience a 50% bump in their CPP pension.
That’s a substantial addition and may help increase the CPP levels to more effectively tackle the rising cost of living. It may also give you more wiggle room when planning for the retirement income you would need to augment your CPP and OAS pensions. But it’s still not enough as a standalone retirement income source (even if you add OAS), and you will have to augment it with savings/investments.
Ideally, a few good dividend stocks can fill that gap. If you divert enough capital to a reliable dividend stock offering a good yield, they can help you generate a steady income to supplement the CPP and OAS pensions.
A reliable dividend stock
Emera (TSX: EMA) is a utility company with multiple regulated utility operations. It has seven regulated utility companies under its banner and provides services (predominantly electrical) in multiple international markets.
The bulk of its revenue comes from Florida; hence it’s also the primary source of capital investment and growth for the company. The company is rapidly growing its renewable capabilities, and the capacity is already at 1.6 gigawatts.
As an investment, Emera offers a healthy mix of dividend and capital-appreciation potential, both of which are valuable from a retirement-planning perspective. The dividends have a direct impact on an investor’s income production potential. At its current yield of 5.1%, the company can help you generate a monthly income of about $127 with $30,000 invested.
It may not seem like much, but enough capital invested in reliable dividend payers like Emera can result in a sizable dividend income, enough to augment the enhanced CPP for retirement expenses.
Foolish takeaway
It’s recommended that Canadians try to maximize their CPP and OAS pensions however much they can. The only practical way of doing it is to defer taking the pensions till you are 70 years old, which can be practical if you already have a healthy dividend income and enough savings to sustain you, or if you choose to keep working beyond the typical retirement age.
