The New Rules of Retirement for 2022
COVID-19 has certainly set some retirement savers back. About 17% of Americans are saving less for retirement due to COVID’s impact on their finances, according to a survey by The Penny Hoarder, and one third of Americans also say they will retire later than initially planned because of COVID, according to a study from Age Wave and Edward Jones.
At the same time, inflation is on the rise and could erode the value of retirement savings if it continues.
One solution is to increase contributions and the government has already changed some retirement-related rules for 2022 in an attempt to do just that. To confront inflation and adjust for the current cost of living, the government has modified some retirement-related rules which are allowing Americans to contribute more to some of their plans.
Taxpayers can now contribute an extra $1,000 into their 401(k) plans, with the total contribution limit for 2022 increased to $20,500 for the year, according to the Internal Revenue Service. This is up from $19,500 in 2021 and 2020. The yearly contribution limit for 403(b) and 457 plans was also increased to $20,500.
This change will affect a small portion of Americans, as only 8.5% of taxpayers who contribute to 401(k) plans contribute the maximum allowed amount, according to Congressional Research Data. The average contribution to a 401(k) was 9.4% of salary, according to data from Fidelity.
Limits on contributions remain unchanged for traditional and Roth IRAs at $6,000. Traditional and Roth IRAs are typically held by Americans who don’t benefit from a workplace plan. Only 67% of private industry workers had access to an employer-provided retirement plan as of March 2020.
The IRS also boosted tax deduction thresholds, called income phase-outs, for traditional and Roth IRAs contributions, to keep up with inflation. Phase-out ranges determine if a taxpayer is eligible to claim a full deduction of an IRA contribution amount, a partial deduction, or no deduction based on the taxpayer’s income.
For Roth IRAs, income phase-outs are rising to $129,000 to $144,000 for single savers and $204,000 and $214,000 for couples filing jointly in 2022. For Saver’s Credit plans, the income phase-outs are set at $20,500 to $34,000 for singles or married individuals filing separately and $41,000 to $68,000 for married couples filing jointly.
The government also made some changes to Social Security to account for a higher cost of living. The main change is that social Security payments will increase by 9.5% in 2022. The average Social Security benefit for retired workers will climb $92 to $1,657 a month. The 5.9% cost-of-living adjustment for 2022 is significantly higher than the 1.3% that took place in 2021.
Social Security beneficiaries who still work will also be able to earn $600 more in 2022 before part of their Social Security benefit is temporarily withheld. But Americans who turn 62 in 2022 won’t be able to claim their full retirement benefit as the full retirement age for those born in 1960 is increasing to 67, up from 66 and 10 months for those born between 1955 and 1959. Beneficiaries who still want to retire prior to turning 67 will see a reduction of their payments.
Americans are having to work longer and retire later in life while needing to put more money aside for retirement. Hopefully, more people will soon become aware of the changing rules of retirement and take advantage of these opportunities in order to maximize their savings.