In 2022, the United States saw a significant increase in inflation. It seemed everything was increasing except pay. Inflation has caused many to halt retirement contributions, hindering future growth. When combined with the awful performance of the stock market, it is wise to worry about your retirement account.
There are several steps you may take in 2023 to safeguard your financial situation in light of the fact that inflation has been a severe problem for everyone.
Here are some helpful suggestions.
Request more from the bank
In light of the dramatic rise in interest rates over the past year, it is now possible to earn returns on savings accounts, money markets, certificates of deposit, and other cash equivalents. Examine your bank statement, and if your interest rate is still pitiful, consider switching banks or consulting a financial expert to locate better options.
Request more at work
To keep up with inflation, companies typically offer a “cost of living” raise. If your human resources department provided you with the standard 3% raise, you would be taking a salary cut.
Discuss with your firm the possibility of the Social Security-mandated cost-of-living adjustment of 8.7 percent to offset the increase in goods and services across most industries.
Use it prudently
If you are fortunate enough to obtain a significant increase, you should use the additional funds prudently. You do not want to fall victim to lifestyle creep or an increase in your typical spending when you have more money.
Try to maintain your former standard of life and utilize any surplus funds to pay down debt, save for the future, or build an emergency fund. If you have variable-rate debt, such as a home equity line of credit or personal credit cards, you should pay it off as quickly as possible because it becomes more expensive as interest rates climb.
Boost your financial contributions
IRS has raised contribution limitations for the majority of retirement savings plans. This is good news for those of us that are behind. The 2023 restrictions will be as follows:
401(k): $22,500 yearly with a $7,500 catch-up provision for those 50 and older.
IRA: $6,500 yearly with a $1,000 catch-up provision for those 50 and older.
HSA: $3,850 per year for individuals and $7,750 per year for families, with a $1,000 catch-up provision for those 55 and older.
SIMPLE IRA: $15,000 annually with a $3,500 catch-up provision for those 50 and over.
Annual Defined Benefits: $265,000
Annual Contribution Plan Contribution: $66,000
If you are already contributing the maximum to your retirement accounts in 2022, consider boosting your contributions in 2023 to meet the new, higher limitations.
As a result of the significant changes in the cost of living, you and your advisors may need to have numerous new planning discussions. Discuss with your CPA or financial advisor the potential tax planning options associated with prolonged employment, relocation to a different U.S. state, researching Roth IRA conversions, and other income tax timing tactics.
What you should know
Inflation is frightening and harming many families, but there are methods to mitigate its impact. Taking deliberate actions with the assistance of a reputable and skilled advisor can significantly affect your financial future.