If you’re a retiree interested in boosting your CPP pension, you’ve probably heard that it’s impossible. “You can increase your CPP by working more or delaying benefits, but if you’re already retired, it’s game over” is pretty much the standard line. It’s kind of true, but it’s not the full story. While it’s impossible to increase your pre-tax CPP 12 months after you’ve started receiving it, you can
- Increase your after-tax amount; and
- Supplement your CPP with investments.
In this article, I will review two methods to increase the CPP you actually receive (hint: both involve your Registered Retirement Savings Plan, or RRSP).
Make RRSP contributions
Making RRSP contributions can increase your after-tax CPP by lowering your income. CPP is income like any other; if your income is lower, you’ll likely pay less tax on it. Specifically, you need to make enough RRSP contributions to push you into a lower tax bracket.
For example, the second-lowest federal tax bracket in Canada starts at $55,867. If you make $60,000 a year with CPP and all other income sources combined, you can push yourself down a bracket with $4,134 in RRSP contributions. That should reduce the amount of tax you pay on your CPP benefits — maybe not immediately, but certainly when you get your tax refund.
You must invest in order to maximize your RRSP benefits
You can reduce your CPP pretty easily with your RRSP contributions. However, there is no point in making an RRSP contribution if you don’t invest. The tax break on contribution isn’t much of a benefit in itself, the years of tax-free compounding (i.e., un-taxed growth) are what really make the RRSP valuable.
So, you should invest in assets. For beginner investors, things like index funds and Guaranteed Investment Certificates are ideal. If you’re a bit more experienced, you could try dividend stocks.
Such stocks pay a lot of cash income — more than the market indexes do on average. Consider a stock like TD Bank (TSX:TD), for example. TD Bank is a Canadian bank stock that has a 5.05% dividend yield at today’s prices. Such a yield means that you get $5,050 in annual cash back if the dividend never changes. The really cool part is that TD’s dividend has historically changed — it has gone up — and the current macroeconomic environment is a good one for banks in many ways.
Interest rates are high, yet inflation rates are falling, which argues that we are seeing a “plateau” in interest rates. It’s in environments like this one that banks tend to make good money because rates are high enough for banks to collect a lot of interest, but inflation is not so high as to demand further rate hikes, diminishing the value of outstanding fixed-rate loans. It’s a good time to be a bank. And TD is one of the best banks in Canada.
Foolish takeaway
Can you really increase your CPP benefits after you’ve started taking them? In one sense, yes; in another sense, no. CPP is inflation-indexed, and from 12 months after you receive your first CPP payout, you should see slight increases in its amount each year. These increases are incremental, though, and there is nothing you can do to cause a large one-time jump in pre-tax amounts after 12 months. You can, however, increase your after-tax amount. By making regular RRSP contributions, you can lower your marginal tax rate and take home more CPP. You may even get a little investment income out of it someday.
