Retirement planning is tedious but necessary and requires as early a start as possible. Late planning or not planning at all could be costly to future retirees, including Canada Pension Plan (CPP) users.
The Canada Pension Plan Investment Board (CPPIB), not the government, oversees, manages, and invests the CPP fund in the best interest of CPP contributors and beneficiaries. However, CPPIB reminds everyone that the pension is not a retirement plan but a foundation for retirement.
Some future retirees plan to rely solely on the CPP (and Old Age Security OAS) in their sunset years. However, you can commit a CPP pension mistake if you don’t fully understand the mechanics.
Disincentive for early claims
The CPP pegs the standard retirement age at 65, although users can claim or start pension payments at 60. If you don’t have health issues or urgent financial need, rethink your plan to collect your CPP pension immediately when available. With this early option, you risk a 36% permanent reduction in your monthly pension payment.
Fill the income gap
Realize at the onset that the CPP will not replace 100% of your income when you retire. If you’re retiring today, the income replacement level is 25%. Enhancements are underway, but only those contributing after January 1, 2019 will benefit from the improved 33.33% replacement level.
The CPPIB’s message is clear – Canadians are still responsible for building retirement funds to ensure financial stability in the sunset years. CPP users can fill the income gap by using their savings or free cash to purchase dividend stocks. You can build a substantial nest egg over time through the power of compounding.
Dividend aristocrats
TELUS (TSX: T) and Canadian Western Bank (TSX: CWB) are reliable wealth builders. Also, both are dividend aristocrats owing to 19 and 31 consecutive years of dividend increases, respectively. The 5G stock pays a 6.37% dividend ($22.94 per share), while the bank stock yields 5.26% ($25.29 per share).
Canada’s second-largest telecommunications firm recently announced a staff reduction program affecting 6,000 employees. However, TELUS expects to realize more than $325 million in cumulative annual cost savings. It should also support free cash flow expansion in the coming years and the multi-year dividend program.
Rising interest rates and high inflation are strong headwinds for banks in 2023, although CWB continues to outpace the broader market (+7.81% year to date). Moreover, in the first half of fiscal 2023 (six months that ended April 30, 2023), revenue and net income rose 2% year over year to $537.3 million and $164.4 million, respectively.
CWB President and CEO Chris Fowler notes the solid loan growth across the bank’s national footprint in the second quarter but expects lower annual loan growth. Still, when market conditions improve, management will capitalize on opportunities to accelerate new client growth. The $2.4 billion bank will present its Q3 fiscal 2023 results on September 1, 2023.
Crucial factor
Seniors are vulnerable to financial distress in retirement without proper retirement planning. Deciding on when to start CPP payments is a crucial factor. The flipside of early claims is deferment until age 70, which increases the pension by 42%.
