CPP Pension: You Can Earn 42% More if You Wait Until 70

The transition from the working life to the sunset years is both exciting and frightening. Making the retirement decision isn’t as easy as before, because of the uncertainties brought by the global pandemic. Would-be retirees must weigh their options carefully, including the take-up of the Canada Pension Plan (CPP).

Retirement planning can’t be haphazard or a hit-or-miss activity. While you get rid of job stress, the post-retirement life is a new journey. The financial burden could be heavier, because no more paycheck is coming. Many Canadians rely on the CPP and the Old Age Security (OAS) for sustenance in retirement.

Standard pension

The CPP reserve the standard benefits for users who reach the full retirement age of 65. In 2021, the maximum monthly benefit a new recipient could take home is $1,203.75. However, the actual amount varies depending on how much you have paid into the system during the working years.

Since many aren’t eligible to receive the max payout, the average amount is $619.75 per month. Thus, the reckoning point begins at $7,437 annually. You can start payments as early as 60 or delay until 70 but with financial consequences.

Percentage decrease

The early option means a significant decrease in your CPP pension. If you decide to start payments as soon as the pension becomes available, the amount reduces by 7.2% per year before 65. The total permanent decrease is 36%. Thus, the average annual CPP could fall to $4,759.36. You potentially forego $2,677.32 of lifetime income.

Percentage increase

The delay option offers an incentive to CPP users. By starting payment at age 70, the pension increases by 8.4% per year after 65. The overall permanent increase is 42%. Thus, instead of the average annual amount of $7,437, the pension bumps to $10,560.54, or $3,123,54 more per year.

For Canadians who are in excellent health, the five-year wait should be worth it. Waiting until 70 is the less-expensive way to boost your lifetime income. You can also elect to defer your OAS to 70 to increase the benefit amount by 36% permanently.

Solid backstop

The CPP and OAS are the foundations of the retirement system in the country. However, both pensions can’t guarantee the ultimate financial wellness in retirement. It would be best if soon-to-be retirees have a solid backstop or reinforcement in the sunset years.

If your finances allow, invest in Royal Bank of Canada (TSX:RY)(NYSE:RY). You can buy the top-tier bank stock today, accumulate as many shares going forward, and hold it forever. Canada’s largest lender pays dividends every quarter, so you’ll have more financial cushion.

RBC’s current share price is $125.96, while the dividend yield is 3.43%. Suppose your initial investment is $50,000, the quarterly windfall is $417.50. If you don’t spend the dividends and reinvest them instead every time, your money will compound to $96,458.20 in 20 years.

The $179.17 billion bank is ideal for risk-averse investors. RBC’s dividend track record is 151 years. Believe it or not, the total return over the last 48.36 years is 46.401.31% (13.54% CAGR). RBC has endured the harshest economic downturns. The COVID-19 pandemic is no exemption.

Retirement is a long-term goal

Figure out your income needs before making a firm decision. If you think the standard CPP isn’t adequate, consider the delay option for an instant 42% boost in pension payments.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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