Hoping to Retire? Don’t Miss the CPP Benefits Increase

Retirement is no longer the same as it used to be in the early 2000s. Technology has changed the world we live in. Expenses are increasing faster than income. Instead of relying on a single source of income, one is diversifying their income sources. To keep up with the changing trends, the Canada Pension Plan (CPP) enhancement program aims to increase your payout by 33-50% when you retire. But you have to qualify for this benefit increase. 

How much salary can get you maximum CPP benefits on retirement? 

The Canada Revenue Agency (CRA) rules are clear, to get the maximum CPP benefit for a lifetime, contribute the maximum for your 40-year work life. Before 2019, your CPP contribution was 4.95% of your pensionable earnings. Now this contribution rate has increased to 5.95%. 

The CRA increases the maximum pensionable earnings annually based on several factors. While we cannot say with surety what the next year’s maximum pensionable earnings would be, we can make an educated guess. 

Between 2019 and 2023, the CRA increased the maximum pensionable earnings at a compounded annual growth rate (CAGR) of 3%. Assuming a 3% CAGR, the 2025 maximum pensionable earnings is expected to be around $70,700. 

Till 2023, it was easy to see if you qualify for the maximum CPP benefit. Just see if your annual salary is higher than the maximum pensionable earnings. But from 2024 onwards, another phase will be added in which you will qualify for an enhanced CPP contribution of 4% if your annual income exceeds the maximum pensionable earnings. 

Do you qualify for the 50% CPP benefits increase? 

The CRA will increase the enhanced pensionable earnings by 14% in the next two years. If your annual salary is above that and grows more than 3% annually, you qualify for the 50% CPP benefit increase. Here again, we don’t know the maximum limit, but we have made an educated guess. 

So if the CRA sets the enhanced maximum limit at $72,400 for 2024, the maximum CPP contribution will be $4,007.90 ($3873.45 + $304). 

Phase 1 CPP contribution will be 5.95% of $65,100 ($68,600 – $3,500). No CPP is deducted up to $3,500 income. The contribution comes to $3,873.45. 

Phase 2 CPP contribution will be 4% of $3,800 ($72,400 – $68,600), which comes to $304. 

These numbers are estimates to see if you qualify. If your annual income is $80,000 and grows by 3% annually, we can reasonably assume that you qualify for the 50% CPP benefit increase. 

Grow your CPP payout beyond 50%

You cannot control where to invest your CPP contribution. But you can control your investments in Tax-Free Savings Account (TFSA). While the TFSA maximum contribution limit is $6,500, you can invest that amount in growth stocks. When your money grows, book profits and invest a higher sum in dividend aristocrats that give you 5-6% annually in dividends and even grow them alongside inflation. 

One dividend stock is the Power Corporation of Canada (TSX:POW). It has an average dividend yield of 5.5% and has been paying regular quarterly dividends since 1998. It even grew dividends annually, but the 2008 Global Financial Crisis forced the company to pause dividend growth for six years. However, the company recovered from the crisis and resumed dividend growth at a 7% average annual rate. 

POW pays dividends from the dividend it earns from its holdings in Great-West Lifeco and IGM Financial. These two companies operate in Canada, the United States, and Europe. POW has diversified beyond life insurance and wealth management into real estate and private equity. The diversification of its holdings can grow your money with the economy. 

POW is just one stock. Diversify your portfolio to ensure your passive income can thrive in all market cycles.