The Canadian Pension Plan (CPP) is retirement income for life, but more is needed to live comfortably. First, the benefit only replaces part of pre-retirement income (25% or 33% soon with enhancements). Even the Canada Pension Plan Investment Board (CPPIB), the pension fund manager, reminds everyone that the CPP is a foundation of retirement, not a plan.
However, the pension offers a financial incentive for those wishing higher benefits. Users can consider starting payments at age 70, instead of 60 or 65. The reward is a 0.7% increase every month past 70 (8.4% yearly) or a maximum, permanent increase of 42%.
If the average retirement pension at 65 is $831.92 (January 2024), the monthly amount jumps to around $1,181.33. On an annual basis, the total is $14,175.12, or $4,192.88 more. Unfortunately, the informal survey results by The Globe and Mail early this year regarding CPP take-ups is that 34% of users start payments at the earliest possible age, or 60.
Around 19% claim theirs at 65 (standard age), while fewer wait five years more to collect. The early option is popular for those with health issues and urgent financial needs. However, those without those concerns could lose $100,000 in retirement income for claiming early.
Game-changer
What is the rationale for delaying CPP pension benefits? The delay option is a game-changer, and the Canadian Institute of Actuaries listed several reasons. Deferring the CPP is advantageous if you project an average life expectancy. The current life expectancy for Canada in 2024 is 83.1 years.
Regarding finances, the institute says your income stream is inflation-protected. For investments, it compensates for the market risks in case your portfolio returns a low or normal rate of return only. In summary, the delay option protects seniors against the financial risks associated with inflation, financial market returns, and longevity.
Bridge the gap
Future retirees can claim CPP benefits past 65 but not go the distance. Some users bridge the gap by creating income streams from investments. You can achieve the same annual CPP benefit at 70.
A long-term option, if not a low-volatile stock you can buy and hold forever is Canadian Utilities (TSX:CU). TSX’s first dividend king and has increased dividends for 52 consecutive years. At $36.02 per share, current investors relish a 17.9% year-to-date gain and partake in the 5% dividend yield.
The $7.4 billion utility and energy infrastructure company boasts a highly contracted and regulated earnings base. Its global and growing rate base of $15.4 billion serves as the foundation for continued dividend growth. From 2024 to 2026, Canadian Utilities plans to invest $4.6 to $5 billion in regulated utilities.
Management expects the additional capital investment to contribute significant earnings and cash flows while creating long-term shareholder value. The best part about this dividend king is that you’d be receiving pension-like income.
Bountiful retirement income
Canadian seniors can also delay Old Age Security (OAS) payments for five years. The maximum payment (36% increase) rises to $970.14 instead of $713.34 at age 65. Your retirement income would be bountiful if you added the CPP and OAS benefits to the income from a dividend king.
