Did you know that Canada Pension Plan (CPP) benefits increase a little bit every year, regardless of how much or for how long you worked?
It’s true. The CPP is inflation-indexed, meaning the amount paid to beneficiaries increases a little each year. Technically, “inflation indexing” could result in the amount going down some years too, although that rarely happens. For the most part, the CPP’s inflation-indexing means increased nominal benefits over time.
This year, CPP benefits increased, as the last year saw significant inflation. Perhaps you’ve read articles that claimed the average CPP for a beneficiary taking benefits at 65 was something like $758. Those articles may have been accurate at the time, but this year, there’s a new average.
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$831
According to Boomer and Echo, the average CPP benefit for those taking benefits at age 65 is $831. This comes from Federal Government data, so it’s probably accurate. $831 per month works out to $9,972 per year. The amount is technically taxable, but if CPP is your only income, then $9,972 worth of it is fully consumed by the basic personal amount tax credit.
So, the good news is if you take CPP at age 65 and have no other income, you likely won’t pay any taxes. The bad news is you most likely won’t be making enough money to make ends meet. If you have a spouse who is still working or draws a large pension, you might scrape by. But with just $831 in income coming in, you’ll be hard-pressed to find a city in which you can pay rent.
What to do if $831 per month isn’t enough
First things first, just because $831 is the average amount for a retiree who draws CPP for the first time at age 65 doesn’t mean that that’s precisely the amount you’ll be getting. You can get up to $1,364 per month in CPP at age 65, but getting that amount depends on a few things. For example, your average earnings over the period in which you were paying into CPP. If that amount was less than the maximum pensionable income threshold, then you won’t get $1,364 per month.
Investing in your RRSP
One way to get more CPP money is to use your Registered Retirement Savings Plan (RRSP). First, if you earn enough CPP to be taxed on it, the RRSP contributions will reduce your taxes. Second, you can invest money in your RRSP and use the proceeds (dividends and capital gains) to supplement your CPP.
Many Canadian investors like to hold stocks like Fortis (TSX:FTS) in their RRSPs. One reason is that such stocks pay dividends. In Fortis’s case, the dividend yield is 4.4%, meaning that each $100,000 invested pays back $4,400 per year. The dividend payment amount has increased over time.
Another reason people like to hold such stocks in RRSPs is because they tend to be more stable than the average company is. Utilities might not be the most exciting companies on earth, but an investment in Fortis will give you a smoother ride than some newly IPO’d (initial public offering) tech startup that has no profit yet.
Third and finally, Canadian investors may enjoy an edge when it comes to analyzing Canadian companies. Most likely, you know a little bit about the local laws, economy, and other factors impacting a company like Fortis. That’s an advantage when it comes to understanding a stock. So, stocks like FTS may be sensible holdings in your diversified RRSP portfolio.
