Have you ever noticed that Canada Pension Plan (CPP) payments aren’t nearly enough to actually cover your expenses in retirement? If you’re near retirement age, you’ve probably looked at your expected CPP benefits and thought, “Maybe it’s best if I work a few more years.” If you’re already retired, well, you don’t need me to tell you how that goes.
CPP benefits usually don’t amount to much. However, they can be substantial. The absolute maximum CPP benefit a person can get is $1,855 per month, which works out to $22,260 per year. That’s not nothing. However, the average CPP amount for a new recipient — about $700 per month — is pretty darn close to nothing. In this article, I will explore how you can increase your CPP benefits if you aren’t getting enough.
Many variables go into calculating your CPP benefits
The first thing to know about CPP benefits is that many variables go into calculating them. First, there’s your income level throughout your career. CPP premiums are taken out up to a maximum known as maximum pensionable earnings. No premiums are taken out beyond that point. The amount paid in premiums — a function of income — is a factor in how much CPP you get.
Another factor is the age at which you take benefits. If you take CPP benefits before age 65, you get 7.2% less per year compared to if you’d waited until you turned 65. If you take CPP benefits after age 65, you get 8.4% more for each year after you turn 65 (up until age 70).
If you aren’t retired yet, delay taking CPP
It follows from the paragraph above that delaying taking CPP is one way to increase your CPP benefits. It’s generally recommended that you take CPP no sooner than your 65th birthday. There’s some debate about whether waiting until age 70 is worth it. In the past, I thought that taking benefits at 65 was optimal because it usually results in more cumulative benefits by age 80. However, I recently watched a video by Ben Felix of PWL Capital, who showed that statistically, somebody who is already 60 is likely to live far beyond age 80. So, maybe 70 is the ideal age for those who are healthy.
If you’re already retired, try claiming more tax breaks
Last but not least, if you’re already retired, you could try increasing your after-tax CPP by claiming more tax breaks. Many charitable contributions, work-related expenses and education expenses are tax deductible. If you don’t keep track of them and claim them on your taxes, you won’t get the refund! So, maybe try to keep track of your expenses as best as you can, keeping receipts for everything. It could trigger a tax refund, which, if CPP is your only income, basically amounts to getting more CPP.
Investing in an RRSP
A great tax break to claim is a Registered Retirement Savings Plan (RRSP) contribution. RRSP contributions are tax deductible. They trigger tax refunds. Also, when you put money into an RRSP you get to invest and compound it tax free.
It’s generally recommended that retirees invest their money in index funds. The reason is that these funds are cheap and relatively low-risk. Consider iShares S&P/TSX Capped Composite Index Fund (TSX: XIC) for example. It’s a Canadian exchange-traded fund consisting of the 240 largest Canadian companies by market capitalization (value of all the shares combined). It has just a 0.04% management fee. It is highly liquid and traded frequently, which lowers your execution costs. Basically, it’s the kind of fund that can fund a wealthy retirement. It’s definitely one to look into.
Whether you decide to invest, delay taking CPP or some combination of the two, remember this: retiring comfortably is all about expectations. Stick to a budget and prepare for at least a decade before you stop working, and you should make it to your golden years in good shape.
