The Early Retirement Roadmap: Claiming CPP at 60 — Yes or No?

Early retirement handwritten in a note

Is early retirement feasible in today’s economic environment? For Canada Pension Plan (CPP) users, early retirement means claiming the pension at 60. However, there is much to lose with the early take-up.

If you start payments before the standard retirement age, the amount decreases by 7.2% per year before 65 (0.6% each month) or a 36% permanent reduction in five years.

The CPP, a contributory earnings-related social insurance program, is a foundation for retirement but not a retirement plan. Those with health issues and urgent financial needs are often the early takers. However, without both issues, claiming the CPP at 60 might be the best decision for others.

Income gap

Very few CPP users qualify for the maximum monthly pension of $1,364.60. Assuming you are 65 today and claiming your CPP, the average monthly payment is 831.92 (as of January 2024). If you claim at 60, the annual pension drops 36% from $9,983.04 to $6,389.15 ($570.64 monthly).

The financial consequence is significant if the CPP is the only source of retirement income. You’ll have to wait five more years for the Old Age Security (OAS) to kick in to boost your pension. The CPP replaces only 25% of the pre-retirement income and, soon 33.33%, with the enhancements. Thus, there is a need to fill the income gap.

Benefits

Claiming the CPP at 60 benefits users with stock investments and building retirement wealth. There is liquidity or regular income streams to cover expenses while growing balances in investment accounts like the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA).

It might not be material at age 60, but lower income in retirement can help minimize, if not avoid, the OAS clawback in the future.

Dividend investing and reinvesting

Dividend investing and dividend reinvesting are sure-fire ways to build retirement wealth and ensure a comfortable retirement. Most RRSP and TFSA users buy dividend stocks and reinvest dividends to realize the power of compounding. Today, a top-performing big bank stock is a safe option for CPP users with early retirement plans.

National Bank of Canada (TSX:NA), the country’s sixth-largest lender, outperforms its larger peers thus far in 2024. At $112.63 per share, current investors enjoy a 13.6% year-to-date gain on top of the decent 3.76% dividend yield.

The $38.6 billion bank is profitable and has consistently reported over $3 billion in net income from fiscal years 2021 to 2023. In the first quarter (Q1) of fiscal 2024 (three months ended January 31, 2024), profit increased 5.3% year over year to $922 million, notwithstanding the 39.5% jump in provision for credit losses to $120 million versus Q1 fiscal 2023.

Its chief executive officer, Laurent Ferreira, said, “The earnings power of our diversified business mix and defensive posture provides us with resiliency and flexibility. Our results reflect effective capital deployment to generate profitable long-term growth, active cost management and simplification efforts.”

National Bank compensates for its lack of size with consistent stock performance. Given the low 42.84% payout ratio, the quarterly payouts should be continuous and uninterrupted for years to come.

The plan to succeed

It is difficult to develop a foolproof early retirement roadmap for CPP users. However, success depends on meticulous planning, including setting up multiple sources of income.

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