Having helped someone else through a similar update issue, I’m going to assume you’re using the Ansible deploy method.
If you’re using the Ansible playbook method, and don’t understand every single step the playbook is doing, I recommend deploying Lemmy manually.
It sounds like your Posgres password changed in the playbook variables and got set to a new value in the lemmy config and docker-compose files. But once a Postgres DB is initialized, the env vars for the initial DB, user, and password are no longer needed/processed. Thus, your compose file, playbook, and lemmy config have a different password than what Postgres was setup with.
Try shelling into your Postgres container and re-setting the password for the Lemmy user to what’s defined in the lemmy config and compose file and seeing if that gets you past the incorrect password error.