Planning for retirement is becoming difficult with the rising cost of living and longer life span. With the speed at which things are changing, it is difficult to gauge how the scenario would be 10 years from now. And if you keep delaying retirement planning, you might have to save a higher amount. To help Canadians with this retirement puzzle, the Canada Revenue Agency (CRA) started a two-phase Canada Pension Plan (CPP) enhancement plan. It aims to give 33% of your income since 2019 in the CPP payout. The second phase of the CPP enhancement plan began in 2024.
If you are a high-income earner, you could see a higher deduction from your monthly paycheck from 2024 onwards.
What’s the CPP contribution amount for 2024?
The maximum CPP contribution for 2024 is $3,942.45 if you are an employee. If you are self-employed, the contribution is doubled to $7,884.9, as you pay both the employee and employer contributions.
How do you arrive at this amount? A $3,500 basic pensionable earning is exempt from the deduction. Any amount you earn above $3,500 up to $68,500 (maximum annual pensionable earnings for 2024) is subject to a CPP deduction of 5.95%. The employer will deduct 5.95% as employee contribution from $63,100 ($68,500-$3,500) = $3,754.45.
If your 2024 pensionable earnings are above $68,500, you qualify for CPP2 on earnings up to $73,200. Your employer will deduct 4% of employee contribution on a maximum of $4,700 ($73,200-$68,500) = $188.
Adding up $3,754.45 CPP contribution and $188 CPP2 contribution, your employer can deduct a maximum of $3,942.45 CPP contribution in 2024.
Is a $3,942.45 contribution enough for retirement savings?
Even the enhanced CPP will only cover a third of your expenses. You have to make arrangements for the remaining two-thirds. The CRA encourages Canadians to invest for retirement through the Registered Retirement Savings Plan (RRSP). You can invest 18% of your income up to a maximum of $31,560 in RRSP in 2024 and deduct this from your taxable income.
It is suggested that you invest 8-10% of your gross income towards retirement, provided you start early. The more you delay your retirement planning, the higher the amount you will need to save for retirement. If you invest almost 24% (5.94% CPP contribution + 18% RRSP contribution) of your income towards retirement, you could create a sizeable portfolio to help you retire comfortably. But this proportion could increase if you have less than 10-12 years to retire.
Two stocks to complement your CPP contributions
Without delaying further, it is best to start now. Just as you put $4,000 in CPP contributions, you could invest $4,000 annually in Telus (TSX:T) and CT REIT (TSX:CRT.UN). These income stocks grow their payouts annually, helping you earn an inflation-adjusted passive income during retirement. CT REIT gives a monthly payout of $0.07485 per unit and increases it by an average of 3% every July. The REIT has stable cash flows from the rent it gets from its biggest tenant, Canadian Tire.
Sparing you from the calculation, a $2,000 investment in CT REIT for 20 years could help you invest $40,000 in the stock. If the REIT gives a 5% average yield, it could give you at least $2,000 in annual passive income. You can compound this income by investing in the dividend-reinvestment plan (DRIP). The REIT will buy more shares from the distribution money and increase your share count.
Never put all your money in one stock. Always have multiple sources of income. Another source could be Telus, which gives quarterly payouts. The telco has been growing dividends since 2005, and its dividend-growth rate is currently 7%. It has the benefit of 5G, which will help it grow its payouts in the long term as artificial intelligence at the edge connects to the cloud. Like CT REIT, Telus also offers DRIP.
You can accumulate more shares over the next 20 years and build multiple passive-income sources.
