Yahoo Finance CPP Benefits: The Amount Is Set to Increase!
Written by Andrew Button at The Motley Fool Canada
CPP enhancement is set to enhance retirees’ CPP payments in a big way. A series of increases in CPP contributions from 2019 to 2023 will increase the CPP payouts received by those who contributed while the enhancement was ongoing. If you were already retired by 2019, then you will not see any boost from CPP enhancement, but you will benefit from occasional inflation adjustments. If you are still un-retired, then read on, because I’ll spend the next few paragraphs exploring what CPP enhancement is and how you can benefit from it.
CPP enhancement: What it is
CPP enhancement is, as the name implies, an enhancement to the CPP formula. Each year from 2019 to 2023, the premiums paid into CPP increased slightly, increasing the pool of money used to buy investments for the CPP pension fund. Over the course of the last five years, the CPP premium rose from 5.10% of pensionable income to 5.95%. In addition to that, there is a second ‘phase’ of enhancement in which the ceiling on pensionable earnings will increase. It’s projected that CPP will be taken out of earnings up to $81,100 in 2025, which is a big increase from today’s level. The increase in premiums plus the higher earnings ceiling will lead to an increase in benefits for those who paid in during or after enhancement.
How it works
The way CPP enhancement works is pretty simple. The increased premiums you pay are used to fund investments, which hopefully earn a satisfactory return. Then, when you go to retire, you receive a higher amount of benefits than what you’d have earned before enhancement. The old CPP formula aimed to replace 1/4 of a person’s working age income. The new one aims to replace 1/3. So, if you earned $60,000, under the old formula, you’d have received $15,000 in CPP. Under the new one you should receive $20,000. Assuming, that is, that everything goes smoothly and the plan stays solvent.
How to supplement your CPP even further
The boost you get from CPP enhancement could be substantial. There’s a big difference between 1/4 and 1/3. As we saw in the example above, it’s a $5,000 difference for someone earning $60,000 per year. However, CPP enhancement alone probably won’t take care of your retirement. $20,000 a year is only $1,666 per month – that’s not enough to pay for rent in Toronto. So, you’ll need to supplement your CPP with something to make ends meet.
One great option is to invest in stocks and stock ETFs. Stocks, as you may know, are pieces of companies. ETFs are diverse collections of such pieces. Index ETFs are good options for retirees to consider, because they’re highly diversified, which helps reduce risk.
Why is Royal Bank of Canada a good stock?
Why is Royal Bank of Canada a good stock?
If you want to try your hand at individual stocks, you could consider dividend stocks like Royal Bank of Canada (TSX:RY). Large-cap dividend stocks tend to be less volatile (i.e., ‘risky’) than other stocks. In other words, they don’t swing up and down very much compared to the market. This caps the upside potential but also provides a ‘smoother’ ride.
For one thing, it is fairly inexpensive, trading at just 10 times the company’s annual profit. For another thing, it has a high dividend yield (4.3%), so you can get a lot of income out of it. Finally, the company has a modest payout ratio and has been growing its earnings over time. So, there is potential for the dividends it pays out to increase. Over the last 100 years, said dividends have increased significantly. Overall, Royal Bank of Canada is a strong company that has stood the test of time.
The post CPP Benefits: The Amount Is Set to Increase! appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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