By Harvest ETFs
The Canada Pension Plan (CPP) serves to provide eligible Canadians over the age of 60 with a “modest financial foundation” for their retirement. It is meant to be combined with old age security (OAS) and a retiree’s savings and other income to fund a retirement which could last for 30 years or more. CPP benefits vary based on how long you worked, how much you earned, and how much you contributed to the CPP during your working years. They are also adjusted in January of each year to meet the cost of living. The Canada Revenue Agency sets a maximum ‘pensionable earnings’ limit under the CPP for each year. Earnings above that level do not require CPP contributions. The maximum pensionable earnings rate for 2023 has been set at $66,600.CPP benefits are also adjusted in January of each year to meet the cost of living.
In 2022, CPP benefits were increased by 2.7% raising the maximum monthly benefit amount at age 65 to $1,253.59. While this increase could help retirees, considering inflation rates above 8% for most of the year, varying eligibility for the maximum benefit, and the possibility of declining CPP benefits, retirees need to look beyond what the government pays if they want to live their retirement dreams.
How CPP works
Canadians who worked in the country between ages 18 and 70 and contributed to the Canada Pension Plan are eligible for monthly CPP benefits once they turn 60. According to the government of Canada, the standard age to start is 65, but retirees can also wait until they turn 70 to start their benefits.
The longer you wait until turning 70 to active your CPP, the higher your monthly benefits will be. That amount maxes out at age 70, though, so waiting any longer has no additional benefit.
CPP benefits also change over time, at monthly rates based on when you started receiving benefits. If you claim benefits before you turn 65, the benefit amount will drop at a rate of 0.6% for each month you will receive benefits before your 65th birthday. That’s a rate of 7.2% per year up to a maximum of 36% if you start at age 60. For example, if you started receiving benefits at age 64, you would receive 7.2% less in your monthly benefits.
If you start after age 65, your benefits will actually increase by 0.7% each month (8.4% per year), up to a maximum increase of 42% if you delay until age 70. Claiming your benefits at age 66, for example, would mean you receive 8.4% more in monthly benefits.
The Canadian Retirement Income Calculator is a useful tool to estimate your benefits.
There are clearly distinct advantages in waiting until age 70 if you can delay it. Nevertheless, that maximum $1,253.59 paid at age 65 would still only be $1,780.10 per month after the 42% increase taken at age 70.
Retirees therefore face two key questions around CPP: how to survive until 70 without necessarily having to work or draw down on savings and how to supplement the modest income CPP provides after they turn 70.
Thankfully, there are investment options that retirees may want to consider.
Retirement income options beyond CPP
Pre-retirees who want to wait until age 70 to activate their CPP and retirees who want to supplement their existing CPP income may want to consider equity income ETFs as a source of cashflow.
These ETFs are portfolios of equities—stocks—that are combined with a covered call option writing strategy to deliver monthly cashflow. Some equity income ETFs offer an enhanced level of income with the addition of modest leverage.
The Harvest Diversified Monthly Income ETF (HDIF:TSX) is one such ETF, holding an equal weight portfolio of 6 Harvest equity income ETFs, combined with leverage at around 25% to deliver an annualized yield of 9.6% as at August 22nd which is paid through a monthly cash distribution.
In addition to its high yield number, much of the income generated by Harvest equity income ETFs held in the HDIF portfolio comes from covered call option writing and is taxed as capital gains not income. That tax efficiency is another benefit for retirees trying to make it to 70 without drawing on their CPP.
Retirees who want income that supplements their CPP benefits or pre-retirees who want to activate their CPP benefits at age 70 may want to consider equity income ETFs. The high annualized yield they generate, paid as tax-efficient monthly cashflow, could help Canadian retirees live well in retirement.