We haven't experienced rising prices like this in the U.S in more than 40 years.
Leading up to the mid-term elections, the economy, and specifically inflation, are the biggest issues for voters as evidenced by current polling. For example, a recent CBS News poll found that almost 70% of voters feel the economy is doing worse and 65% feel the current administration is not doing enough to combat inflation.
In addition to dealing with the erosion of purchasing power, rising inflation can have a profound impact on financial planning in the areas of retirement and taxes.
Some good news – Social Security checks will be bigger next year
One of the key features of Social Security benefits is they are tied to inflation through annual cost of living adjustments (COLAs). Last week, the Social Security Administration announced the COLA adjustment for next year’s benefit will increase by 8.7%.
- That’s an increase from roughly 6% last year, and the largest annual increase since 1981
- The average monthly benefit will increase from $1,681 to $1,827; the highest maximum benefit will increase from $3,345 to $3,627
- Also, those delaying their Social Security retirement benefits will not lose this large COLA adjustment. The increase will be factored into their benefit amount once they claim, even if they wait until age 70 to claim benefits
- As an added benefit, Medicare Part B premiums will be slightly lower in 2023 compared to 2022
- Unfortunately, for those still working, the higher inflation environment will result in a greater increase in how much of their earnings will be subject to Social Security payroll taxes ($147,000 in 2022 to $160,200 in 2023)
Social Security COLA on the rise
Source: Social Security Administration.
Retirees must be careful about withdrawals in this challenging environment
Those drawing income from portfolios need to be aware of the impact of inflation, and current market conditions, on the long-term sustainability of their savings. Consider that for a couple reaching age 65, there’s a greater than 50% chance that one of the partners will live to age 90.
For example, a common approach in transitioning to retirement is to take draw roughly 4% of portfolio holdings each year, adjusted for inflation.
Given the deep declines in both the equity and fixed income markets, clients may want to adjust the percentage of their withdrawals and consider not factoring in the current high inflation figure. Read more in "Choose a sustainable withdrawal amount in retirement."
Inflation will impact key tax figures as well
- The good news for taxpayers is that the inflation rate will result in higher adjustments to certain key tax items such as the standard deduction and individual tax brackets
- According to Bloomberg Tax, inflation-adjusted amounts in the tax code will increase by roughly 7% in 2023, more than twice the amount of the increase for 2022
- In fact, the unified, lifetime exclusion for gifts and estates for 2023 is projected to be $12,920,000, which allows an individual to shelter an additional $860,000 of net worth from taxation
Inflation has been stubbornly high and set new records this year. It is not clear how long this issue will persist. Because inflation has an impact on current finances as well as future purchasing power, it is important to review your financial and retirement planning with an advisor who is familiar with your situation.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.