If you’re worried about whether you’ll be able to retire on schedule, you’re not alone.
A recent study found that 59% of Canadians are worried about outliving their nest egg. If you’re one of them, you’re right to be concerned. Canada has experienced substantial inflation in recent years, and many investors’ savings have not kept pace. Also, government benefit programs like CPP and OAS don’t pay much, each of the programs just mentioned paying $600–$700 per month on average. Some Canadians have the benefit of defined benefit (DB) pensions on top of their CPP and OAS, but the number of Canadians who have those has been shrinking over the years.
So, retirement is getting harder. That’s just a fact. It doesn’t mean that retirement has to be impossible, though. Through diligent saving and investing, you can get to a point where you have enough to live off of in your golden years. In the following paragraphs, I will share one move you can make that should significantly ease your retirement worries.
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Delay taking CPP
If you want to maximize your income in retirement, a powerful move you can make (assuming you are not retired already) is to delay taking CPP. Delaying taking CPP increases the amount of pension income you get by more than 0.5% per month. That amount compounds, leading to substantial increases in total monthly pension income. If you take CPP at age 65, you get about 56% more money than you would have by taking benefits at age 60. If you take CPP at age 70, you get even more!
So, if you had originally planned on taking CPP at age 60, delaying that move until you turn 65 could be a wise move.
As for delaying all the way until age 70:
Surprisingly, studies show that’s generally not optimal. While someone who first takes CPP at age 70 gets more monthly income than someone who takes it at age 65, the person who takes CPP at 70 begins receiving benefits only one decade before age 80. The average lifespan in Canada is roughly 80 years. So, the person who takes CPP at age 70 most often loses total lifetime benefits compared to the person who takes benefits at age 65.
Invest more
In addition to delaying taking CPP, another good move to make your retirement income go further is to invest a higher share of your income. Two great vehicles to invest in are the RRSP and TFSA. The RRSP gives you a tax break when you contribute, then lets you withdraw your funds (ideally) at a lower tax rate in retirement. The TFSA lets you contribute and withdraw funds completely tax-free, but does not provide a tax break on contributions.
If you’re going to be investing in an RRSP or TFSA, a good investment to consider is the Vanguard FTSE Canadian High Yield ETF (TSX: VDY). It’s a fund consisting of about 60 high yield Canadian stocks. The fund pays out dividends every month, which helps if you’re counting on dividends to cover your living expenses. It also has an above-average (2.9%) yield and a relatively low (0.22%) management fee. These characteristics make VDY a pretty good fund for Canadian retirees to hold. In combination with delaying taking CPP, holding this fund in a tax-free account could go along way toward helping you pay for your retirement.
