CPP payments are a crucial lifeline for many Canadian retirees. Research from Statistics Canada shows that the average Canadian retiree has only $129,000 in RRSPs by the time he/she hits age 65. That’s not nearly enough to live on, and with defined benefit (DB) pensions becoming less and less common, it’s getting harder and harder to make ends meet in one’s “golden” years.
Fortunately, the CPP does pay out some passive income that can supplement your investment income in retirement. If you wait until 70 to take CPP, the amounts received can be substantial. Not only that, but the amount of CPP increases each and every year! Most years, anyway. The CPP is indexed to inflation, meaning that it goes up when the cost of living goes up. As a result, you can usually expect to receive more CPP in the coming year than you’re receiving in the current year.
That’s significant because inflation has been rising in recent years. Ever since Canada and other Western countries re-opened from their COVID-19 lockdowns, prices have been going up at a faster pace than in pre-COVID years. In this article, I explore what rising inflation means for your CPP payments.
Higher CPP
Because inflation is on the rise, you can probably expect to receive more CPP next year than you received this year. CPP amounts for 2025 haven’t been announced yet, but we know the formula used to calculate them, and we also have 10 months worth of inflation data for 2023. The CPI formula is:
- Average CPP (year one) divided by average CPP (year zero), all minus one.
The rate you get from this formula is the CPI percentage increase, which is also roughly the next year’s rate of CPP increase.
Now, we can’t say exactly what next year’s CPP amount will be, because we don’t have all the data used to calculate it yet. A given year’s CPP is based on the inflation rate in the prior November to October period. So, until we have September and October’s CPI increases, we won’t be able to say how much you’ll get. However, inflation seems to have mostly averaged around 3% in the last 10 months, so the 2025 CPP hike is likely to be close to that level.
How to deal with variance in CPP payments
If you’re worried that next year’s CPP won’t cover your retirement expenses, you could consider investing to make up the difference. Dividend stocks can make great retirement holdings, because they provide regular cash income.
Consider The Canadian National Railway (TSX:CNR), for example. It’s a dividend stock with a 2% yield. That yield might not sound like much, but the company has a very high dividend growth rate, with the payout having gone up 10% per year over the last five years. The company’s dividend growth streak has lasted at least 27 years. The dividend growth may have gone on longer than that, but the data source I’m looking at only goes back 27 years.
Will CN Railway keep up its dividend growth into the future?
I’m inclined to think it will. First, rail transportation is the cheapest way to send massive amounts of goods by land, giving it an edge over trucking. Second, CN Railway has only one major competitor in Canada. Third and finally, CN’s rail network touches three North American coasts and ships $250 billion worth of goods per year, making it economically indispensable. These points lead me to think CNR will thrive in the years ahead.
That’s not to say you should go out and invest your entire RRSP in CNR. It’s just an example to illustrate what’s possible with dividend stocks. Nevertheless, it may make a good core holding in a diversified portfolio.
