Are you depending on the Canada Pension Plan (CPP) payout for retirement? While CPP can give a decent payout, it may not meet all your necessities. Here’s why.
Have you started planning your retirement? If you are in your mid- or late 30s and CPP payouts are your only retirement option, you might want to reconsider retirement planning. I suggest we do a small scenario building.
Is it possible to retire on CPP alone in 2024?
Imagine you are turning 65 this year. The maximum monthly CPP payout you can collect is $1,364.60 for 2024. And if you delay your CPP claim to age 70, the monthly payout could go up to $1,937.73. Very few people actually get the maximum payout as it needs maximum CPP contribution throughout the 40 years of your work life.
Has your CPP contribution till now always hit the upper limit? If the answer is no, you know that the option of maximum payout is out. The average CPP payout is $760.07 per month, or $9,120.84 per year, if you were to retire in 2024. It doesn’t even meet the basic personal amount of $15,705.
The Canada Revenue Agency (CRA) has enhanced the CPP contribution in 2024 to give future pensioners a higher amount. But even that payout will make up for a third of your average salary earned in your work life. No matter from whatever angle you look at, CPP alone is not enough to retire. It is not meant to replace your working income but to substitute for your basic needs.
Three things to do before you retire
First, look at your current monthly expenditure and see where most of your income is going. If it is debt repayment or mortgage, work towards repaying your mortgage to retire debt-free.
Second, work towards increasing your active income by upgrading your skills. The higher your salary, the higher the CPP contribution and likely future payout. While you missed the opportunity to collect the maximum CPP payout, you can at least work towards getting an above-average payout.
Lastly, invest in your retirement through registered savings accounts.
Don’t retire with CPP alone
The CRA has increased the Tax-Free Savings Account (TFSA) limit to $7,000. Unlike other accounts, TFSA allows tax-free withdrawals. I would suggest avoiding using TFSA money to buy a house or repay a mortgage. First Home Savings Accounts (FHSAs) allow tax-free withdrawals only if used to buy your first house. You could consider using your TFSA for emergencies and other passive income and complement your CPP payout.
Brookfield Renewable Partners (TSX:BEP.UN) is a good long-term investment for retirement, as it offers both capital growth and dividends. The company is aggressively building solar, wind, hydro, distributed generation and storage projects across 20 countries. It has 166 gigawatts (GW) of electricity generation capacity, and another 134 GW is in the pipeline. Every new project that comes online generates a cash flow stream.
It has increased dividends in nine out of 12 years while its stock price has appreciated 70% in five years. Considering that the world is shifting to greener energy sources, Brookfield Renewable Partners has a bright long-term outlook. Just as you contribute a specific amount from your active income to CPP, you can invest $300 per month in this stock.
In 15 years, your invested amount will be $54,000. And if your total investment yields a 5% annual dividend, that is a $2,700 yield on this amount comes to $1,800 annually. I haven’t incorporated any dividend growth or capital appreciation in it. But the overall amount will be higher.
This way, you can build a portfolio of passive income with regular investments in three to four dividend-growth stocks.