Most Canadians know they will start receiving the Canada Pension Plan (CPP) at some point in their lives. What most don’t know is how valuable CPP benefits really are. While most people only receive $600 to $1,000 per month in CPP money, you can receive much more than that if you play your cards right. With CPP and Old Age Security (OAS) combined, you can receive significant retirement income. In this article, I will share three reasons why CPP benefits are more valuable than you think.
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Reason #1: The CPP is well managed
The first reason why CPP is more valuable than you think is because its investment portfolio is very professionally run. The CPP portfolio is spread across stocks and bonds and has returned about 8.6% per year (compounded), which is a pretty good return for a portfolio with a significant bond allocation. The bond allocation has to be there, because it helps with liquidity and managing volatility.
The CPP board’s professional management gives you a good reason to believe that the program will remain solvent and will be there for you when you retire.
Reason #2: The CPP is being enhanced
A second reason why CPP is worth more than you think, is because it is being enhanced. CPP enhancement has two phases, the first of which concluded last year. From 2019 to 2023, your CPP contributions rose from 5.1% to 5.95%. The second phase begins this year and involves increasing the maximum pensionable earnings limit (how much of your income you pay contributions on).
Now you might be thinking “all these premiums sound like a cost not a benefit,” but they come with a light at the end of the tunnel. As a result of enhancement, the CPP board projects it will be able to increase benefits from 25% of an average pensioner’s working income to 33%.
Reason #3: The maximum amount of CPP you can receive is a substantial income supplement
Third and finally, the absolute largest amount of CPP benefits a person could possibly receive ($1,854 per month) is actually a pretty substantial sum. $1,854 per month is $22,248 per year, which is enough to cover rent in many Canadian cities.
Most people think of CPP as a trifling $600 or $700 per month bonus, but if you wait all the way until age 70 before taking benefits, and earn the maximum pensionable amount, then you can make your CPP go quite a way.
You should still supplement your CPP with investments
Despite how valuable CPP can be if you play it right, you should still supplement your CPP with investments. Generally speaking, low-cost index funds held in an Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are the way to go.
Consider iShares S&P/TSX Capped Composite Index Fund (TSX: XIC). It’s a Canadian broad market exchange-traded fund (ETF) that holds 224 stocks, charges a 0.04% management fee, and is widely traded/highly liquid.
These characteristics make XIC a classic “low-cost index fund” of the type that has produced such solid returns to investors who have stuck with them over the years. First, the diversification reduces the risk inherent in the holdings. Second, the low fee means you don’t pay out too much money to the fund’s operators. Third, the high liquidity means you don’t lose too much money to market makers who trade the shares for you. Overall, it’s a compelling package.
