While low inflation may be a good thing for most consumers since the cost of goods and services doesn’t rise as fast, it could lead to lower limits on retirement account contributions and diminish Social Security benefits.
Some laws tied to inflation could lead to a cut in the maximum you’re allowed to sock away in a 401(k) or receive in benefits. That could mean your nest egg may not grow as much as you hope.
According to an article in USA Today, a study conducted by human resource consultant Mercer showed that maximum 401(k) contributions could be cut next year by as much as $1,000 taking the total to $16,000. (There is also a catch-up contribution of $5,000 allowed for those 50 or older.) The current caps are $16,500 plus $5,500 more if you’re 50 or older.
This would be the first time the IRS has reduced 401(k) contribution limits, and the potential move comes at a time when retirement plans have already taken a serious hit.
Individual retirement accounts (IRAs) won’t take the same hit, however, since a different method is used to calculate those limits.
Social Security benefit recipients could also take a hit next year. In a time of deflation, when consumer prices fall, the cost of groceries and other goods fall or stay the same, and Americans stop needing more money to pay the bills.
As a result of negative inflation, however, recipients may not get a cost-of-living increase in their payouts. To know for sure, recipients will have to wait until October, when an official announcement about cost-of-living changes is expected.
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