Canada Pension Plan (CPP) users should remember that the CPP is a pillar of retirement income for Canadians, not a retirement plan. The Canada Pension Plan Investment Board (CPPIB) manages the fund and helps to provide Canadians a foundation upon which to build financial security in the sunset years.
Despite years of contribution to the fund, the payout when you retire replaces a portion of pre-retirement income, not 100% (25% for old and 33% for new with enhancements). A regular pensioner retiring and claiming the CPP at 65 will receive, on average, $831.92 monthly (as of January 2024), or $9,883.04 yearly.
Pension boost
Canadians have ways to boost their CPP benefits, including the Old Age Security (OAS). The OAS benefit kicks in two waves without a retiree lifting a finger. As of 2024, the maximum OAS benefit is $713.34 monthly (age 65 to 74) and then increases to $784.67 for retirees aged 75 or older.
The combined CPP and OAS benefit at 65 is $1,616.59 monthly. However, it might not be enough to retire on or provide a comfortable standard of living. The CPPIB assures the sustainability of the CPP fund but stresses that users must look for other income sources or create additional income.
Retirement accounts
Retirement planners suggest saving and investing to create passive income to supplement retirement benefits like the CPP and OAS. Canadians can first set up retirement accounts like the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA).
Maximizing the annual RRSP and TFSA contribution limits is ideal, although consistent contributions to both accounts, regardless of amount, could help build a considerable nest egg over time. Dividend stocks are also ideal holdings in either account because you can reinvest dividends for faster compounding of account balances.
RRSP holding
Canada’s banking sector is a bedrock of stability, as evidenced by the more than 100-year dividend track record of the Big Five banks. Bank of Nova Scotia (TSX:BNS), the third-largest lender, pays the highest dividend yield among the giants. At $62.33 per share, you can partake in the lucrative 6.8% dividend yield.
Assuming your RRSP contribution room is $31.560 (the maximum in 2024) and you invest in BNS, the money will generate $2,158.70 annually. If you reinvest the quarterly dividends, the principal will nearly double to $62,184.60. The 172-year dividend track record should give you the confidence to buy and hold this big bank stock.
TFSA stock
Freehold Royalties (TSX:FRU) is a cheaper but prolific option in a TFSA because it pays monthly dividends. At $13.62 per share, the dividend offer is 7.93%. A $7,000 position in this energy stock will produce $555.10 in tax-free income annually.
This $2.05 billion dividend payer is not an oil producer but boasts a large portfolio of oil and natural gas royalties in Canada and a sizeable land base in the United States. The energy royalty company incurred a loss in 2022 but has been profitable since.
David M. Spyker, president and chief executive officer of Freehold, said, “Our high margin, oil-weighted portfolio enables us to provide consistent and sustainable returns to our shareholders while retaining optionality to fund future growth initiatives.”
Increase financial security
CPP users should consider maximizing retirement accounts like the RRSP and TFSA to boost their pensions and increase financial security in retirement.
