Are you nearing the age of 60 and wondering whether you should take your Canada Pension Plan (CPP)?
It’s an important question to ask yourself because your decision about when you’ll take CPP determines a lot about your finances in retirement. If you take CPP early, you’ll get more years of benefits, but if you take it late, you’ll get more benefits per year. A person who lives a very long life (say, 90 years or more) will benefit more by taking benefits late.
In this article, I will explore the best argument there is for taking CPP at age 60, along with a strategy you can use if you can’t afford the low benefits.
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Urgent health needs
The best reason to take CPP at 60 is if you have urgent healthcare needs that prevent you from working. If you can’t work past 60, then you’re going to need to find passive income somewhere, either through investments, your employer-sponsored pension, or CPP. Taking CPP early is pretty much essential in this scenario if your investments and employer-sponsored pension don’t pay enough for you to live on.
A corollary of the point above is that you should take CPP early if you have a below-average life expectancy. It would not be appropriate for a non-healthcare professional to speculate on what might give you that trait, but your doctor can usually give you a rough estimate of your life expectancy. If your doctor tells you that you have only a few years left, there is little reason for you to delay taking CPP.
Why it’s such an important decision
The reason why your decision about taking CPP is important is because it is irrevocable. You can cancel your CPP payments for up to 12 months after you start receiving them. After 12 months, you’re stuck with the payment you’ve got. So, you should take the decision about your benefits seriously. Sit on the fence for 12 months plus a day after getting CPP, and you lose the right to choose.
An alternative to taking CPP early
If you’re not quite sure whether to take CPP early, you can always keep working. If you’re able to work, then any time you spend delaying your decision simply means higher benefits. Sweet!
While you’re deciding whether to take CPP early, it wouldn’t hurt to invest some of your savings. If your savings are just sitting in a bank account, you might be surprised at how much further they could go when invested in stocks, bonds or index funds.
Consider Fortis (TSX:FTS), for example. It’s a Canadian dividend stock with a 4.36% dividend yield. This yield means that if you invest $100,000 into FTS, you’ll get $4,360 back in dividends back each year if the yield doesn’t change. Historically, the dividend has changed: the company has hiked its dividend every year for the last 50 consecutive years! If history is instructive, then Fortis’s dividend will go higher in the future.
In the trailing 12-month period, the company’s revenue rose 7.3%, and its earnings grew 6%. So, it looks like Fortis is growing just enough to deliver the 4-6% annual dividend hikes it has planned. The company’s utility assets are 98% regulated, which gives them protection from competition. On the whole, Fortis looks like a fairly safe utility stock for retirees to own.
