Why Claiming CPP at 65 Could Be a Mistake

The CPP pegs the start retirement age at 65, but it’s not necessarily the ideal option to start pension payments.

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Many Canadians rely on the Canada Pension Plan (CPP) for financial sustenance during retirement, although the pension does not replace 100% of the pre-retirement income (up to 33% with the enhancements). The plan’s standard retirement age is 65, but starting payments at that age is subject to a pensioner’s financial need.

For people who are 65 and start payments today, the maximum monthly amount is $1,364.60 ($16,375.20 per year). However, most CPP users don’t qualify for the max and instead receive the average monthly payment of $758.32 (as of October 2023).

From a financial perspective, claiming the CPP at 65 could be a mistake, considering the total annual average of $9,099.84 is only 55.6% of the maximum amount. Hence, a pensioner risks financial dislocation in retirement. Fortunately, healthy seniors or those without immediate financial need have a way to increase their pension payments.

Financial incentive

The CPP has an incentive for users who have time to wait and delay pension payments past 65. Pension payments increase by 0.7% each month or 8.4% per year after the standard retirement age. The latest age at which you can start payments is 70. Assuming you go the distance, the maximum permanent increase in five years is 42%.

If you’re eligible to receive the average, the increase in absolute amount is $3,821.93, for a total of $12,921.77 per year. Unlike the early option, the delay option is zero cost to the pensioner. You can collect CPP as early as 60, but the consequence is a 36% maximum permanent reduction in pension payments (7.2% per year before 65).

Work and receive

Some CPP users under 70 can work and receive payments, provided they continue to contribute. All CPP contributions are mandatory until age 65 and optional between 65 and 70. A portion of your income goes to the CPP fund even when you receive benefits.

This situation or continued CPP contributions while working can increase your future pension payments due to the Post-Retirement Benefit (PRB). The pension amount adjusts upward owing to the additional contributions.

Augmenting the CPP

CPP users can fill the income gap or shortfall of pension payments with investment income or dividends. Today, one of the generous and reliable passive income providers is TC Energy (TSX:TRP). At $55.02 per share, this large-cap stock pays a lucrative 6.98% dividend.

This $57 billion energy infrastructure company is also a Dividend Aristocrat. The most recent board-approved 3.2% dividend hike marked TC Energy’s 24th consecutive year of dividend growth. In 2023, net income ballooned 341.3% to $2.83 billion versus 2022.

After its record operational performance and financial results last year, the company will soon spin off the liquids pipelines business. TC Energy will become a low-risk, natural gas and energy solutions company. South Bow will assume the oil infrastructure business and operate independently.      

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A $30,000 position will generate $2,094 annually, or $174.50 in quarterly passive income. The dividend earnings instantly boost the CPP pension at 70 or serve as your recurring income source during the waiting period.

A foundation

The CPP is a foundation of retirement rather than a consummate retirement plan. That is why starting pension payments at 65 requires careful deliberation and planning. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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