Retirement is close. It is time to think about your Canada Pension Plan (CPP) benefits. The Canada Revenue Agency (CRA) determines 65 as the age to get the average CPP benefit. If you take the benefit earlier than 65, it decreases by 0.6% each month. If you delay the claim, your benefit increases by 0.7% each month. While more is merrier, should this be the basis for you to wait till 70 to claim the CPP benefit?
Should you wait till 70 to claim the CPP benefit?
The average Canada Pension Plan (CPP) benefit was $758.23 per month in October 2023, or $9,098.76 a year. If we take this amount as the base, you could either reduce your CPP benefit by $3,275.5 or increase it by $3,821 a year. After 70, there is no point waiting as there is no incentive. But should you even wait till 70 or claim it at age 65?
You have to consider three things: your health, your financial situation, and your retirement plans.
- If you have a shorter life expectancy, there is no point in waiting. You might claim CPP at 65 or earlier and enjoy the payout till your last breath.
- If your financial situation is not strong, and you need money for basic necessities, you might as well cash out the benefit. What use is the benefit if it can’t help in times of need?
- But if you have a job even at age 65 and it is paying well, consider your retirement plan. How much have you saved up for retirement?
It brings us to the question:
How much money do you need to retire?
One method of calculating the retirement amount is to have 25 times your annual income in the retirement pool. If your annual income is $70,000, you might want $1.75 million in your retirement pool. Of this $70,000, around 15% would be taken care of by CPP and old age pension (OAS). So you need $59,500 x 25 = $1.5 million.
If you don’t have enough retirement savings and have a longer life expectancy, you might want to delay your retirement and wait till 70 to earn the maximum CPP benefit.
Can you accumulate $1.5 million by investing $6,000 to $7,000 in a Tax-Free Savings Account (TFSA) every year? Maybe not. Thus, the CRA also allows you to invest through a Registered Retirement Savings Account (RRSP) that has a maximum contribution limit of $30,000-plus if you are a high-income earner. Since the RRSP contribution is 18% of your salary, the CRA is indirectly enticing you to save that much.
You can still make a $1.5 million retirement pool without investing 18% of your income.
Building your CPP alternative
Since you know CPP is not enough, you might want to consider building CPP alternatives. If retirement is not far behind, consider investing in resilient growth stocks like Constellation Software (TSX:CSU). The general rule says that your equity investments should reduce with age as equity has risk. But there are some resilient stocks like Constellation that have the potential to give you a 30% average annual return.
It is better to give your money a chance to grow faster than inflation. Constellation works on the power of compounding. Constellation acquires smaller companies with stable cash flows and stickiness because of the mission-critical nature of the software. It uses the cash flows from these companies to acquire more companies. Each company operates individually, and Constellation benefits from their 2 to 3% organic growth and a higher percentage from compounding their cash flows through acquisitions.
A $10,500 investment in Constellation Software in February 2019 would have bought you nine shares. They are now worth $32,893. The stock just tripled its money in five years. While there is no certainty that it can replicate similar returns, this is a good chance to accelerate your retirement pool and come closer to $1.5 million.
Final thoughts
Remember, your investment will continue to generate returns even after you retire. You will not withdraw the entire retirement pool in one go. Even if you withdraw $50,000 a year, you still have a larger sum invested. And your TFSA will be with you till the last breath.
