All retirement decisions, including the starting Canada Pension Plan (CPP) payments, require careful deliberation and exhaustive assessment. The standard age to collect is 65, although CPP users can start early at 60 or wait until 70.
Retirement planners warn of financial consequences if you elect to claim at 60. The CPP payout decreases by 0.6% per month (7.2% annually) before 65 or a 36% permanent reduction of the standard retirement pension. They also remind early claimants that they can’t shift to another option when they begin receiving payments.
Meanwhile, the delay option raises the benefit by 0.7% per month (8.4% annually) after 65 or a 42% increase in five years. However, an informal Globe and Mail survey conducted in January 2024 revealed that 39% of respondents want to start at 60, notwithstanding the lower payouts. Only 16% prefer the delay option.
Are there advantages to claiming the CPP at 60? Contrary to the dire warnings, could it pay off big?
Game changer
The survey respondents favouring early CPP payments cite three reasons for claiming early: financial need to cover living expenses, health problems, and shorter life expectancy based on family health history. However, prospective retirees without the issues mentioned look forward to starting payments at the earliest possible age.
Canadians are fortunate because they can set up several retirement accounts to ensure financial security in the sunset years. You can minimize the risk of financial dislocation in retirement by saving and investing early through the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Moreover, the Old Age Security (OAS) benefit kicks in at 65 and boosts your reduced CPP benefit.
Tax-free passive income
Utilizing the TFSA and maximizing the annual contribution limits enable accountholders to create tax-free passive income. You won’t pay taxes on interest, gains, and even withdrawals. Canadian Natural Resources (TSX:CNQ) is an ideal anchor stock in a TFSA.
At $96.74 per share (+12.63% year to date), this large-cap stock pays an attractive 4.13% dividend. For illustration purposes, a $96,740 investment today will grow 179.33% to $270,219 in 25 years, including reinvestment of quarterly dividends. In a TFSA, it should be 14 tranches of $7,000 annual contribution limits.
The $103.3 billion boasts a long-life asset base and diversified sources of predictable cash flows. More importantly, CNQ has raised its dividends for 24 consecutive years.
Tax shelter
ATCO (TSX:ACO.X) is perfect for tax-free money growth and tax shelter in an RRSP. At $40.25 (+6.25% year to date), this utility stock yields 4.87%. Like CNQ, ACO.X is a Dividend Aristocrat. It has a dividend-growth streak of 29 years. The $4.56 billion company provides energy, agriculture, food, logistics, real estate, shelter, transportation, and water services.
The 2024 RRSP contribution limit is $31,560 or 18% of earned income in the prior year, whichever is lower. Since RRSP contributions are tax-deductible, users can claim tax deductions on contributions to reduce tax payables. A $31,560 position in ATCO today will compound to $105,851.60 in 25 years.
Power of compounding
The power of compounding works best in a TFSA and RRSP and with Canadian Natural Resources and ATCO as anchor stocks. Your income from the Dividend Aristocrats can offset lower CPP payments while you enjoy more years in retirement.
