How Retirement Will Be Different in 2022

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shapecharge / Getty Images
shapecharge / Getty Images

For retirees and those who are getting close, big changes are on the horizon for 2022. Most consequentially, Social Security is getting a makeover with several big updates that will impact most of the country’s roughly 70 million recipients. But there are also a few COVID-19-inspired adjustments as well as potential changes to the most common retirement accounts.

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Social Security Checks Are Getting Bigger — a Lot Bigger

Next year, Social Security recipients will enjoy the biggest increase to their benefits since 1983.

“Social Security has a COLA (cost of living adjustment) coming for 2022, which will give all recipients a 5.9% raise,” said Tony Marlette Jr., a financial advisor with Brookside Tax and Financial Group. “This is the largest increase in decades, and it is based on the Consumer Price Index (CPI), which tracks inflation.”

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The historic bump in benefits is a reaction to the rapidly rising cost of necessities like fuel, food, healthcare and shelter.

“Most changes, or even projected changes to retirement benefits, revolve around inflation,” Marlette Jr. said.

According to the SSA, the average retiree will enjoy an enhancement of $92 — from $1,565 to $1,657 per month.

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Higher Earners Will Get Even More

The SSA is also increasing the maximum monthly payout from $3,148 per month in 2021 to $3,345 in 2022. That’s an extra $197 per month for the highest earners — but don’t worry, the SSA isn’t just giving away the farm to the people who need it least. The wealthiest retirees have to meet several strict criteria to be eligible for the maximum payout, including having worked for at least 35 years until full retirement age and having hit or passed the maximum taxable earnings for all 35 of those years.

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The Rich Will Pay More Into the System

In 2021, any income over $142,800 was exempt from the payroll taxes that fund Social Security. In 2022, the maximum amount of taxable income will increase by $4,200 to an even $147,000. Only about 6% of the workforce will hit that limit, and they’ll kick $520.80 more into the system next year than they did this year.

According to Marlette, the increase “is designed to help prevent potential funding downfalls around the year 2035. No taxes to fund Social Security will be assessed on any income above that limit.”

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The Full Retirement Age Is On the Rise

In the entire history of Social Security, the full retirement age — the age you have to reach to collect full benefits — has been raised 11 times. In 2022, it will be an even dozen as the full retirement age ticks up once again.

“This is the standard age that benefits are based on,” Marlette said. “The earlier taken, beginning at 62, the lower the benefit.”

For those born in 1959 or earlier, full retirement age is 66 years and 10 months. For those born in 1960 or later, it’s 67. If you claim your benefits before your full retirement age, you’ll receive reduced payments for the rest of your life.

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The Income Test Is Changing

Not only do you accept permanently reduced payments when you claim Social Security before your full retirement age, but if you’re still working, you also subject yourself to something called the Social Security income test.

In 2021, the SSA temporarily withholds $1 in benefits for every $2 you earn above $18,960 in annual income or $1,580 in monthly income. Those who filed early in 2021 but who will hit their full retirement age later in the year can earn as much as $50,520 annually or $4,210 a month. After that, $1 in benefits will be withheld for every $3 in earned income.

In 2022, the Social Security income test thresholds will increase to:

  • $19,560 per year or $1,630 per month for early filers who claim Social Security before the year of their full retirement age

  • $51,960 per year or $4,330 per month for early filers who claim Social Security in the year of their full retirement

In short, early filers will be able to earn a little more income in 2022 before their payments are reduced. Those who file at or after their full retirement age are never subjected to the Social Security income test.

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Social Security Credits Are Getting More Expensive

No matter your age, you have to earn 40 lifetime work credits — which are awarded based on income — to be eligible for Social Security. You can earn one credit per quarter for a maximum of four per year.

  • 2021: $1,470 in qualifying income is good for one credit or $5,880 per year for the annual maximum of four

  • 2022: $1,510 in qualifying income is good for one credit or $6,040 per year for the annual maximum of four

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2022 Is the Last Year To Report Coronavirus-Related Distributions

In 2020, the IRS allowed qualified individuals to take distributions of up to $100,000 from eligible retirement plans without being hit with an early withdrawal penalty. They had the choice of reporting those distributions as income in one lump sum in the year they received the funds or to spread it out evenly over three years ending in 2022.

For example, someone who took a $12,000 distribution in 2020 may have reported all $12,000 as income that year. If not, they would have had to report $4,000 in 2020, $4,000 in 2021 and $4,000 in 2022.

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You May or May Not Be Able To Contribute More to Your Retirement Fund

Finally, the IRS might increase the maximum contribution limits on the most common types of retirement accounts — but the jury is still out on that one.

“401(k)/403(b) and IRA/Roth IRA contributions are projected to be increased,” Marlette said. “But this cannot be confirmed until the IRS updates their rules, which typically occurs in early November. As of now, the IRA/Roth IRA contribution maximum is $6,000 — $7,000 if over age 50 — and the 401(k)/403(b) maximum contribution is $20,500 — $25,500 if over age 50 — per year.”

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Last updated: Oct. 20, 2021

This article originally appeared on GOBankingRates.com: How Retirement Will Be Different in 2022