Looking for CPP at 60? Here’s why it can pay off big

Written by Christopher Liew, CFA at The Motley Fool Canada

All retirement decisions, including initial Canada Pension Plan (CPP) payments, require careful consideration and exhaustive evaluation. The standard collection age is 65, although CPP users can start as early as 60 or wait until 70.

Retirement planners warn of the financial consequences if you choose to claim at age 60. The CPP payment is reduced by 0.6% per month (7.2% per year) before age 65 or a permanent 36% reduction in the standard retirement pension. They also remind early claimants that they cannot switch to another option when they start receiving payments.

Meanwhile, the delay option increases the benefit by 0.7% per month (8.4% per year) after 65 years or a 42% increase in five years. However, an informal Globe and Mail the survey conducted in January 2024 found that 39% of respondents want to start at age 60, despite lower payments. Only 16% prefer the delay option.

Are there advantages to claiming CPP at 60? Contrary to the dire warnings, can it pay off big?

Game changer

Survey respondents who favor early CPP payments cite three reasons for claiming early: financial need to cover living expenses, health problems and shorter life expectancy based on family health history. However, future retirees without the aforementioned problems look forward to starting payments at the earliest possible age.

Canadians are lucky because they can set up several retirement accounts to ensure financial security in their sunset years. You can minimize the risk of financial dislocation during retirement by saving and investing early through a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Additionally, the Old Age Security (OAS) benefit begins at age 65 and augments your reduced CPP benefit.

Tax-free passive income

Using TFSAs and maximizing annual contribution limits allows account holders to build tax-free passive income. You won’t pay taxes on interest, earnings and even withdrawals. Canadian Natural Resources (TSX:CNQ) is an ideal anchor stock in a TFSA.

The story continues

At $96.74 per share (+12.63% year-to-date), this large-cap stock pays an attractive dividend of 4.13%. For illustration purposes, an investment of $96,740 today will grow 179.33% to $270,219 in 25 years, including the reinvestment of quarterly dividends. In a TFSA, it must be 14 installments of $7,000 annual contribution limits.

$103.3 billion boasts a long-term asset base and diverse sources of predictable cash flows. Most importantly, CNQ has increased its dividends for 24 consecutive years.

Tax shelter

ATCO (TSX:ACO.X) is perfect for growing money tax-free and tax sheltering in an RRSP. At $40.25 (+6.25% year-to-date), this utility stock yields 4.87%. Like CNQ, ACO.X is a dividend aristocrat. It has a dividend growth streak of 29 years. The $4.56 billion company provides energy, agriculture, food, logistics, real estate, housing, transportation and water services.

The 2024 RRSP contribution limit is $31,560 or 18% of the previous year’s earned income, whichever is lower. Since RRSP contributions are tax deductible, users can claim tax deductions on contributions to reduce taxes payable. A $31,560 position in ATCO today will grow to $105,851.60 in 25 years.

The power of mixing

The power of compounding works best in a TFSA and RRSP and with Canadian Natural Resources and ATCO as anchor stocks. Your Dividend Aristocrats income can offset lower CPP payments as you enjoy more years in retirement.

The post CPP claim at 60? Here’s why it could pay off big appeared first on The Motley Fool Canada.

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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