Each year, Canadian retirees' CPP payouts are adjusted slightly to account for the prior year's inflation. These little boosts are irrespective of your base amount, age upon first receiving CPP, or pensionable earnings. Indexation does not increase your purchasing power; however, compared to a defined benefit plan, it at least maintains it. So, the inflation-indexed quality of the CPP is a very valuable feature that most pensions don't have.

Just recently, the Federal Government announced some new metrics for the coming tax year. These included the CPP indexed amount, the new TFSA limit, and new tax brackets. In this article, I will share the CPP boost that's coming next year and what it means for your finances.

2.7% above your 2024 amount

As a result of the 2024 inflation adjustment, your 2025 CPP cheques will be 2.7% higher than your 2024 amounts. The adjustment begins in January, so you do not need to wait long to see its effects your monthly cheque.

How much is 2.7%?

2.7% doesn't sound like much, but if you get a big CPP cheque to begin with, it could amount to something. Let's say that you got $1,000 per month in CPP before taxes in 2024. If that was the case, then you should receive $1,027 per month in 2025. That adds up to $324 in additional benefits per year! And the increase can be much bigger than that – particularly if you waited until age 70 to take CPP and earned the maximum pensionable amount your entire career. If you earned $1,800 in monthly CPP in 2024, you'll get $48.60 in extra monthly benefits, for $583.2 in extra annual benefits!

Why it doesn't really matter

Now, the above numbers might look enticing, but it's important to remember that all of this extra CPP is just to adjust for last year's inflation. It does not represent an increase in purchasing power. If you found CPP hard to live on this year, you'll probably find it hard to live on next year, too.

A good idea: Invest to supplement your CPP

If your CPP payments don't cover all of your living expenses, it would be wise of you to invest in cash-flowing assets to supplement your CPP. By holding index funds and ETFs in a TFSA or an RRSP, you can build a significant income stream that is exempt from tax – while in the RRSP, and even after withdrawal in the TFSA.

Consider the BMO Canadian Dividend ETF (TSX:ZDV) for example. It's an ETF built on Canadian dividend stocks. These include bank stocks, utility stocks, and energy stocks. All of these categories of stocks have been performing quite well lately, yet they remain cheap compared to big tech, so is there a chance of them outperforming in the year ahead.

The ZDV ETF has a $0.07 monthly distribution, which works out to $0.84 per year. At ZDV's current price of $22.86, that provides a 3.7% dividend yield. That's enough to get $3,670 in annual income if you invest $100,000. Here's how the math on that works:

Like many diversified ETFs, ZDV charges a small fee of just 0.39% per year. That's higher than the typical fee on a broad market fund, but may be worth it if dividends are what you're after. At any rate, the fund is diversified and relatively cheap – your money is probably safe in it.