Deciding when to start Canada Pension Plan (CPP) payments is more complex than easy for prospective retirees. The pension program pegs the standard retirement age at 65 but allows users to choose from three options: take the benefit at 65, collect early at 60, or delay until 70.
All options pay for life, although the early and deferred options have consequences. Money-wise, claiming the CPP at 60 has a disincentive because the payout decreases by 0.6% per month before age 65. A user permanently gives up 36% of the standard retirement pension.
However, for some retirement planners, the deferred option is smarter for two no-brainer reasons. The extended waiting period is worth it because of the financial reward and inflation protection.
Financial reward
Some CPP users without health issues or urgent financial needs would find it financially rewarding to claim the pension at 70. While there’s no benefit to waiting past that age, pensioners get the highest monthly payout by waiting.
The permanent increase is 42% (8.4% per year). If the average CPP amount is $816.52 (for new beneficiaries as of April 2024), the payout rises to $1,159.46. The yearly benefit becomes $13,913.50 instead of $9,798.
Inflation protection
Secondly, an equally no-brainer reason is that you cover future inflation. The CPP benefit amount will never decrease even if the cost-of-living declines. Also, CPP users between 60 and 70 can still contribute and add their post-retirement benefits to their overall retirement income.
Boost retirement income
The CPP is a foundation in retirement, not a retirement plan. Therefore, you can’t rely solely on it (and the Old Age Security) for sustenance. You can secure your financial future by augmenting your pension by creating passive income from an established dividend payer like the National Bank of Canada (TSX: NA).
The Big Bank stock can be the anchor stock in your retirement accounts, like the Registered Retirement Savings Plan (RRSP). The share price is $112.88, while the dividend yield is 3.9%. Canada’s sixth-largest bank delivers pension-like income through the quarterly dividends, and payouts should be sustainable for decades.
The $39.4 billion bank has offered to acquire Canadian Western Bank and is awaiting approval by regulators and CWB shareholders. Its CEO, Laurent Ferreira, said the deal will accelerate National Bank’s strategic plan and pan-Canadian growth as well as expand its geographic reach.
Solid backup
Firm Capital Mortgage Investment Corporation (TSX: FC) is an ideal backup to National Bank and suitable for tax-free money growth in a Tax-Free Savings Account (TFSA). At $11.19 per share, the dividend yield is 8.4%. Notably, the dividend payout frequency is monthly rather than quarterly.
The $386 million non-bank lender provides residential and commercial construction, bridge, and conventional real estate financing. Firm Capital’s mortgage lending business thrives, evidenced by the yearly increases in net income since 2020. In Q1 2024, first mortgages with a less than 75% loan-to-value account for 86.7% of the total portfolio.
Financial sense
Consider the 42% deferral increase if you are financially able, healthy, and expect to live longer. Moreover, it makes financial sense to receive an indexed-to-inflation CPP benefit
