CPP Isn’t Enough: Here’s How Much You Need to Retire

CPP payments are great, sure, but they’re not going to cover all your expenses. That’s why you should take this tip and invest what you can.

| More on:

Image source: Getty Images

The Canada Pension Plan (CPP) is a great way for Canadians to put cash away for retirement without even thinking about it. In most cases, CPP is taken off your paycheque. Therefore, when it comes time to retire, you can start claiming your cash right away!

But should you? And when you do, will it even be enough? In short, no, it won’t. This is why today we’re going to look at some easy methods for future retirees to make the most of their CPP income based on how much they’ll need to retire.

How much do you need?

Obviously, every situation is different when it comes to how much Canadians need to retire. Yet the good news is that most Canadians believe they need far more than what they’ll actually end up needing. In a recent study by the Bank of Montreal (TSX:BMO), Canadians stated they believed they would need about $1.7 million in savings to retire. This was up 20% since 2020 levels.

When it comes to living in retirement, however, a common goal is that you’ll need 70% of your current salary for every year of your retirement. That’s if you’re hoping to live in a similar lifestyle to the one you’re living now. Costs do lower but remain in retirement. That’s especially if you have a mortgage to pay off, kids still living at home, and travel you wish to take. Never mind health issues that tend to crop up as we age.

While there isn’t a magic number, we can come up with some averages. For instance, the average Canadian makes about $66,000 in 2023. As of 2019, the average Canadian spends about 22 years in retirement. If 70% of $66,000 is $46,200 and you’re retired for 22 years, that means saving $1,016,400, with inflation also taken into account.

Yep, over $1 million

Again, those numbers are averages and certainly shouldn’t be taken literally. That being said, it’s certainly a major goal that Canadians have to come up with. And CPP certainly isn’t going to cover the majority of this amount.

As of this year, CPP payouts are a maximum of $1,306.57 per month for new beneficiaries who start receiving their CPP payments at age 65. That being said, these can vary depending on numerous items. One is household income, with the average CPP payment coming in at around $750. Futhermore, these payments are lowered if you take them out between ages 60 and 65.

Still, even if you get the maximum amount, that would just come to $15,678.84, a slight dent in your annual savings. Yet an easy way to increase that number? Hold out until age 70. By doing so, you increase your benefits by about 8.4% year after year. This means by age 70, you’ll receive 42% more than you would have at age 65! So, your $1,306.57 payment turns into $1,855.33 monthly, or $22,263.95 annually!

Invest each year

To make up the difference, there is certainly a method to start saving for and during retirement, and that’s through investing. Here you’ll want to take two methods into consideration. First, retirees who will need cash in the future can put their cash into GuaranteedInvestment Certificates (GIC). This will keep your income safe and away from volatility in the market, thanks to fixed interest rates from banks and corporations.

But for near-term growth, there are other assets you can consider. For example, Canadian banks provide protection thanks to provisions for loan losses. You can put some of your investments aside, and look forward to passive income from dividends along with a bounce in returns.

Canadian Imperial Bank of Commerce (TSX:CM) is a great example, with shares down 20% in the last year. It currently offers a dividend yield of 6.25%, which is far higher than the 5.1% average over the last five years. As shares return to normal, CIBC stock should provide returns as it climbs back to pre-fall prices, along with this higher-than-average dividend yield!

No matter how you choose to save, just start! And with the help of your financial advisor, you’ll be sure to put aside exactly what you need in the near future and long into retirement.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Canadian Imperial Bank Of Commerce. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

ways to boost income
Dividend Stocks

1 Excellent TSX Dividend Stock, Down 25%, to Buy and Hold for the Long Term

Down 25% from all-time highs, Tourmaline Oil is a TSX dividend stock that offers you a tasty yield of 5%…

Read more »

Start line on the highway
Dividend Stocks

1 Incredibly Cheap Canadian Dividend-Growth Stock to Buy Now and Hold for Decades

CN Rail (TSX:CNR) stock is incredibly cheap, but should investors join insiders by buying the dip?

Read more »

bulb idea thinking
Dividend Stocks

Down 13%, This Magnificent Dividend Stock Is a Screaming Buy

Sometimes, a moderately discounted, safe dividend stock is better than heavily discounted stock, offering an unsustainably high yield.

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $15,000 in This Dividend Stock, Create $5,710.08 in Passive Income

This dividend stock is the perfect option if you're an investor looking for growth, as well as passive income through…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Compelling Reasons to Delay Taking CPP Benefits Until Age 70

You don't need to take CPP early if you are receiving large dividend payments from Fortis Inc (TSX:FTS) stock.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Better Dividend Stock: TC Energy vs. Enbridge

TC Energy and Enbridge have enjoyed big rallies in 2024. Is one stock still cheap?

Read more »

Concept of multiple streams of income
Dividend Stocks

Got $10,000? Buy This Dividend Stock for $4,992.40 in Total Passive Income

Want almost $5,000 in annual passive income? Then you need a company bound for even more growth, with a dividend…

Read more »

Investor reading the newspaper
Dividend Stocks

Emerging Investment Trends to Watch for in 2025

Canadians must watch out for and be guided by emerging investment trends to ensure financial success in 2025.

Read more »