Social Security Increase and 3 More Ways Inflation Is Actually a Good Thing for Your Wallet
As inflation continues to impact millions of Americans, it might be difficult to name anything good about it. Fuel oil prices are still up 19.8% more as of October, per the latest Consumer Price Index report released Nov. 10. We’re paying 12.4% more for groceries than we did this time last year. And soon, those winter heating bills will start appearing — and may provide sticker shock when homeowners and renters see that costs are up 20% versus 2021’s cold season.
Yet there are some silver linings when it comes to the record inflation we’ve all been experiencing, per Howard Hook — CPA, CFP with wealth management firm EKS Associates. As he said, “High inflation does positively affect certain items that will save people money.”
Here are some of the benefits tied to inflation that can impact your wallet:
Social Security Payments Are Increasing
Social Security recipients will see a jump in the amount they receive monthly due to inflation. Every year, the Social Security Administration (SSA) looks at rates of inflation to determine the cost of living adjustment (COLA) increase. Such an increase is meant to provide extra money to beneficiaries, including a vast majority of retirees that are living on fixed incomes.
For 2023, the SSA has set that COLA at 8.7%, the highest increase in 40 years, per CNBC. The COLA increase will impact more than 70 million Americans, who will first start to see the new amount on January 2023 checks. The increase will be about $140/month, on average.
Savings Accounts Will Get a Rate Boost
The higher interest rates for loans that have come into play this year also apply to savings accounts. On Nov. 2, the Federal Reserve increased the threshold for federal interest rates to 3.75%-4%. It was the fourth consecutive increase in 2022, enacted as a measure to help curb inflation by making it harder to borrow money, per CNBC. The outlet also noted projections that the Fed could keep rates rising into 2023, potentially peaking at 4.75%.
While that’s not the best news for people looking into a mortgage, the higher interest rates for borrowing are also often applicable to saving. So if you have a savings account, now may be the time to add to it — or start one. Treasury yields, bonds, and certificate of deposit (CDs) all are enjoying those boosts, too. The “crediting rates or cash surrender value of permanent life insurance policies” are also positively affected, Hook said.
As Fortune put it, “The APYs of some high-yield savings accounts are now higher than mortgage rates people locked in last year,” with some experts advising homeowners to redirect their money towards saving rather than aggressively paying down their mortgage.
Federal Income Taxes Will Be Lower
Another inflation-related financial benefit could be lower federal income taxes, starting with 2022 filings. As GOBankingRates previously reported in October, the IRS is changing tax brackets for the upcoming tax season and is also increasing standard deductions — this means you’ll be able to keep more of your money.
According to Hook, the simplest way to explain it is that marginal income tax brackets are increasing by 7%, the standard deduction workers can take is also increasing by 7%, and the 0% capital gains tax bracket is likewise increasing by 7%. This will affect nearly all Americans who file federal tax returns.
Retirement Plan Contribution Limits Are Increasing
Just as it’s a good time to open (or add to) a savings account, it’s also a good time to invest more in a retirement savings plan. That’s because 2023 will see an increase in contribution limits due to inflation.
For 401(k)s and 403(b)s, the limits are increasing by a significant amount of 9.8%, allowing contributions of up to $22,500 (compared to $20,500 allowed currently). For 401(k) and 403(b) retirement accounts with “over age 50 catchup contributions,” these also increase by 15% to $7,500 (up from $6,500). IRA and Roth IRA contributions are also going up by 8% to $6,500 (up from $6,000).
As CBS News noted: “It’s the biggest inflation adjustment since 401(k) plans began indexing to inflation in 2007.” Per CBS News, the IRS usually allows an increase of about $500 a year in contribution limits, if not just keeping it at the same amount.
Hook further added that pension payments tied to the cost-of-living index will also be impacted, an example being retired federal government employees.
Given all of these examples, Hook said, “All the above changes are positive for people. The likelihood however is that inflation is still having a net negative impact on most people’s finances. But it is important for people to understand it is not all negative.”
More From GOBankingRates
- How To Get Free Money: 13 Proven Ways
- Successful Retirees Master These 7 Money Moves To Keep Their Retirement Funds Secure
- 3 Things You Must Do When Your Savings Reach $50,000
- 5 Ways To Elevate Your Finances Daily
