Canadians are quite lucky to have the Canada Pension Plan (CPP) to help fund their retirement. However, is CPP all you need in retirement? Today, let’s take a look at how much retirees can usually expect from CPP benefits, and whether investing could help bridge the gap.
What you get
First, let’s look at what you can get from CPP benefits. There are a lot of factors here, depending on how much you were earning throughout your working years and how much you and your employer contributed. Furthermore, it will depend on when you start taking out benefits as well.
For instance, if you take out CPP starting when you’re 60, the monthly rate you’ll receive will be smaller. In fact, you’ll likely be missing out on thousands at least in income if you decide not to wait until 70. The maximum monthly amount you can receive is reached by the time you turn 70. In fact, it’s been found to add 42% more to monthly payments!
Now, most people aren’t going to max out. But let’s say you are one of these people, and you wait until age 70. That means you could bring in $23,252.78 annually from CPP benefits! That is certainly quite a lot.
But not enough
Most Canadians believe that we need over $1.2 million to retire comfortably. But does that add up? If you’re a Canadian making about $60,000 annually, that means you’ll need to create about $60,000 annually in savings to help see you through retirement.
Therefore, that $23,252.78 certainly won’t cut it. Sure, it will help. Let’s say you plan for 30 years of savings. That means making a total savings of $1.8 million. Cut out the annual CPP you’ll get, and that brings you down to savings at $1,102,416.60.
Again, that’s not going to suddenly show up when you retire. While there will likely be other benefits you might be able to plan for, it’s far better to try and create some savings on hand, which is certainly where investing can help.
Make a mix
For the purposes of this example, I’m going to look at one stock that could certainly help create enough savings over time. However, make sure that you work with your financial advisor to create a diverse mix of assets. These should include Guaranteed Investment Certificates, bonds, exchange-traded funds, and equities.
Now, let’s say you invest in a company such as Royal Bank of Canada (TSX:RY). This company has a long history of share growth and dividends. You can certainly look forward to continuing your investments here for decades to come. It currently offers a 4.13% dividend yield, as well as value trading at 12.74 times earnings.
By using Royal Bank stock, you can put those growing dividends to good use. You can also look forward to growth year after year, seeing shares climb at a compound annual growth rate (CAGR) of 6.5%. That 6.5% growth in your investments year after year, plus any additional income.
So, is CPP enough? In short, definitely not. But it certainly can help bring what you need for retirement down by a significant amount. Instead of $1.8 million needed, you may see a reduction of nearly $700,000! Make sure you plan for every eventuality.
