Canada Pension Plan (CPP) benefits are set to rise in a big way. Thanks to a program that the federal government rolled out in 2019, the benefits paid to those who worked from 2019 onward will be larger than they otherwise would have been. In this article, I will explore the reason why CPP benefits are rising and whether you should delay your retirement to collect more CPP.
Why CPP benefits are rising
The reason why CPP benefits are rising is because of CPP enhancement. CPP enhancement is a program that aims to increase CPP benefits from one-fourth of a pensioner’s previous income (current) to one-third (once the first generation of people who grew up post-enhancement retires). Basically, the enhancement will increase the premiums you pay on CPP to give you more benefits later. If you retired before enhancement began, your benefits won’t be affected (although you’ll get small hikes from inflation indexing).
How does CPP enhancement work?
It occurs in two phases.
The first increases the premiums you pay from 5.1% to 5.9%.
The second increases the “maximum pensionable earnings” threshold from $66,600 to $81,000. Together, these “enhancements” will result in you paying more CPP premiums, but collecting much more at the end.
How much you can gain by delaying retirement
There’s no doubt that you can gain a lot in extra cpp benefits by delaying retirement. The average Canadian retiree’s CPP payout is $811 per month. Maximum CPP if you start at 65 is $1,306. Max CPP if you start at 70 is $1,855. That’s a lot to be gained by waiting, and it doesn’t even factor in enhancement. In the years ahead, as enhancement works its way through the CPP portfolio, it could get to a point where someone earning $60,000 per year could get back $20,000 per year in benefits.
Consider investing
If all this “waiting” and “working” sounds like too much hassle just to boost your CPP benefits, you may have some alternatives in front of you. If you have savings, you can invest them in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). This doesn’t increase your CPP, but it produces cash income, much like the CPP does. So, you could think of your RRSP as a “supplement” to your CPP.
What kinds of assets should you invest in?
Generally, it’s best for new investors to invest in stock and bond index funds. A good strategy is to put 60% of your money in stock funds and 40% of your money in bond funds. The 60% in stocks could get a high return, while the 40% in bonds will be less volatile and more predictable.
As for individual stocks: many investors have done well over the years with Fortis (TSX:FTS). Certainly, you shouldn’t put all your money in an individual stock like Fortis, but it’s worth holding in a diversified portfolio. Why? Because it provides a lot of income.
At today’s prices, Fortis stock has a 4% dividend yield. That means you get $4,000 in annual cash back for every $100,000 invested. That’s a decent supplement to your CPP benefits right there. And it could grow over time. Fortis has increased its dividend every year for the last 49 years straight. Its earnings have grown this year, so it should be able to pull off another dividend hike in 2023. It’s a quality income stock that may continue to reward investors long term.
