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CPP Pension Users: 2 Reasons to Delay Your CPP Until 70

Christopher Liew, CFA
Senior couple at the lake having a picnic
Senior couple at the lake having a picnic

Delaying receipt of the CPP pension until you reach 70 years old is a masterful stroke. Some see it as counterproductive, although there are two main reasons why deferring this government benefit is genuinely beneficial.

While waiting for the pension, you can invest in CPP stocks like Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and TORC (TSX:TOG) to draw passive income. The CPP Investment Board (CPPIB), manager of the CPP funds, has holdings in both companies.

Enhanced benefit

Canadian retirees typically take the CPP benefits at age 65, but you have the option to take your pension as early age 60 or as late as 70. If you elect to delay until 70, you’ll receive 8.4% more for every year of delay or 42% more in total. While earning this incentive, you can invest a premium bank stock like Scotiabank.

Scotiabank is not only the third-largest bank in Canada. This banking giant tends to outperform the market with lower risk compared with the common stock. As a retiree, you need to secure your investment during periods of instability while receiving income at the same time.

Take note that the Big Five banks in Canada, including Scotiabank, stood tall during the 2008-2009 financial crisis. None needed a bailout. It was proven to the world that the banking system in Canada is the most stable and robust. Scotiabank epitomizes strength and financial stability.

This bank stock currently pays a 4.9% dividend to shareholders. A $50,000 investment in this bank stock efficiently produces nearly $170 in monthly income.

Save on taxes and OAS clawbacks

When retirement income streams arrive simultaneously, it creates tax problems and triggers OAS clawbacks. Keep in mind that retirees will ultimately convert the RRSP to an RRIF.

By delaying your CPP, your RRSP will be much smaller by the time to convert to an RRIF comes. You can then make minimum mandatory withdrawals. But one of the intelligent approaches before everything comes to play is to maximize your TFSA.

TORC is the second-biggest equity holding of the CPPIB as of March 31, 2019. It should give you the confidence to invest in this popular energy stock. Likewise, you’re adopting the CPPIB’s investment strategy of focusing on the risk/return characteristics of investments rather than on traditional asset labels.

The shares of this $1 billion oil and gas E&P company is currently trading at $4.53 per share. Its cost is relatively cheaper, but it pays an incredible 6.59% dividend. If you use your new 2020 TFSA annual contribution limit of $6,000, the corresponding yearly income is $395.40.

What I want to highlight here is that when you build your TFSA balance and withdraw the amount, it won’t count as income. Therefore, it won’t affect the OAS.

Financial security

In essence, taking your CPP is protection against longevity risk and ensuring you won’t outlive your retirement fund. All it takes is careful planning and appropriate savings to invest in CPP stocks like Scotiabank and TORC. While waiting for the CPP pension, you’ll have reliable sources of income.

More reading

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA and Torc Oil And Gas Ltd.

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