Retirement planning is tedious but necessary and requires as early a start as possible. Late planning or not planning at all could be costly to future retirees, including Canada Pension Plan (CPP) users.

The Canada Pension Plan Investment Board (CPPIB), not the government, oversees, manages, and invests the CPP fund in the best interest of CPP contributors and beneficiaries. However, CPPIB reminds everyone that the pension is not a retirement plan but a foundation for retirement.

Some future retirees plan to rely solely on the CPP (and Old Age Security OAS) in their sunset years. However, you can commit a CPP pension mistake if you don’t fully understand the mechanics.

Disincentive for early claims

The CPP pegs the standard retirement age at 65, although users can claim or start pension payments at 60. If you don’t have health issues or urgent financial need, rethink your plan to collect your CPP pension immediately when available. With this early option, you risk a 36% permanent reduction in your monthly pension payment.

Fill the income gap

Realize at the onset that the CPP will not replace 100% of your income when you retire. If you’re retiring today, the income replacement level is 25%. Enhancements are underway, but only those contributing after January 1, 2019 will benefit from the improved 33.33% replacement level.

The CPPIB’s message is clear – Canadians are still responsible for building retirement funds to ensure financial stability in the sunset years. CPP users can fill the income gap by using their savings or free cash to purchase dividend stocks. You can build a substantial nest egg over time through the power of compounding.

Dividend aristocrats

TELUS (TSX:T) and Canadian Western Bank (TSX:CWB) are reliable wealth builders. Also, both are dividend aristocrats owing to 19 and 31 consecutive years of dividend increases, respectively. The 5G stock pays a 6.37% dividend ($22.94 per share), while the bank stock yields 5.26% ($25.29 per share).

Canada’s second-largest telecommunications firm recently announced a staff reduction program affecting 6,000 employees. However, TELUS expects to realize more than $325 million in cumulative annual cost savings. It should also support free cash flow expansion in the coming years and the multi-year dividend program.

Rising interest rates and high inflation are strong headwinds for banks in 2023, although CWB continues to outpace the broader market (+7.81% year to date). Moreover, in the first half of fiscal 2023 (six months that ended April 30, 2023), revenue and net income rose 2% year over year to $537.3 million and $164.4 million, respectively.

CWB President and CEO Chris Fowler notes the solid loan growth across the bank’s national footprint in the second quarter but expects lower annual loan growth. Still, when market conditions improve, management will capitalize on opportunities to accelerate new client growth. The $2.4 billion bank will present its Q3 fiscal 2023 results on September 1, 2023. 

Crucial factor

Seniors are vulnerable to financial distress in retirement without proper retirement planning. Deciding on when to start CPP payments is a crucial factor. The flipside of early claims is deferment until age 70, which increases the pension by 42%.  

The post Avoid This CPP Pension Mistake That Can Cost Retirees Thousands appeared first on The Motley Fool Canada.

Should You Invest $1,000 In Canadian Western Bank?

Before you consider Canadian Western Bank, you’ll want to hear this.

Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in August 2023… and Canadian Western Bank wasn’t on the list.

The online investing service they’ve run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 26 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks

* Returns as of 8/16/23

More reading

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Western Bank and TELUS. The Motley Fool has a disclosure policy.

2023-08-30T16:25:20Z dg43tfdfdgfd