The Inflation Adjustment Act, which President Biden signed into law earlier this month, set in motion a wave of speculation among retirees and near-retirees. Should they update their financial plans to reflect the new law?

Most advisors are more circumspect. But here are a few questions and responses to set hearts and minds at ease.

Healthcare savings for seniors
The act promises to reduce certain prescription drug costs, particularly for Medicare recipients. In addition, starting next year, insulin copayments for Medicare recipients will be capped at $35 per month. Then, in 2024, people with Medicare’s “catastrophic coverage” benefit—for excessively high healthcare expenses—will no longer be responsible for 5% of the cost of their prescriptions. Also, from 2025 on, the out-of-pocket maximum for all Medicare-covered prescriptions will be $2,000 per person per year.

“Giving Medicare the ability to negotiate drug prices will probably help over the long haul,” said Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, Calif. But given the limited scope and gradual rollout, she said, “any benefits to retirees won’t be immediate.”

So don’t go out on a spending spree, at least not yet.

Charles Lewis Sizemore, a Dallas-based portfolio manager at Interactive Advisors and principal at Sizemore Capital Management, called the potential to lower drug prices “a major step in the right direction.” Yet he said, “It’s far too early for any of us to start planning on cost reductions. The benefits here—if we indeed see them—will be a few years in the future.”

Much of the potential cost savings will depend on individual circumstances. “People should take this on a case-by-case basis and determine for themselves if their specific prescription costs will be going down,” said Casey Pisano, a wealth advisor at Biondo Investment Advisors in Sparta, N.J.

If you do foresee significant savings, adjust your retirement planning conservatively. “Instead of using the $2,000 cap as the future out-of-pocket assumption [in your planning calculations],” said Mallon FitzPatrick, managing director at Robertson Stephens Wealth Management in San Francisco, “consider using double that amount to provide for a margin of safety.”

Potential healthcare savings for early retirees
Another item extends a temporary expansion of the Affordable Care Act (a.k.a Obamacare). In 2021, at the height of the pandemic, Congress placed a one-year moratorium on the income cap for federal subsidies offered to low- and middle-income households who purchase health insurance through the Obamacare marketplaces. Now, the cutoff won’t be reinstated until 2025.

This is especially good news for those who retired early, perhaps because of ill health, and are not yet old enough for Medicare. “The extension of the enhanced credits will help to continue to reduce that cost for such early retirees,” said Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in St Louis.

Others are more pessimistic. “I have concerns about using a projected medical expense in a plan to be implemented prior to retirement and/or prior to a need,” said Michael Zmistowski of Financial Planning Advisors in Tampa, Fla. “For me, the bottom line is these numbers thrown around sound great for the folks, but it's a false calming effect. Don't get too excited over the savings.”

All in all, exercise constraint. “What you don’t want to do is run out and buy the latest flat screen TV or a new car,” said Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco. “Be prudent and stock away that extra money to create a cushioned emergency fund.”

Time to invest in renewable energy companies?
Besides healthcare cost savings, another primary objective of the act is to help renewable energy companies. But that doesn’t necessarily mean they are now a hot investment idea.

“The broad [sustainable-energy and eco-friendly] sector will see a long-term boost from the Inflation Reduction Act, lifting demand [and] the profitability profile of some players,” said Julie Praline, a director and equity analyst at Crestwood Advisors in Boston. “However, not all companies will benefit in the same way.”

Stuart Katz, CIO at Robertson Stephens, noted that the act “does provide an important accelerant for climate change adaptation and mitigation, and [it] will catalyze several green themes and industries.”

Other observers, however, are more cautious. “The law’s impact on the investment idea is negligible at best,” said Pisano at Biondo Investment Advisors. While it may persuade some people who were on the fence to purchase an electric vehicle, he added, it won’t be enough to alter the fundamentals that make investments attractive or risky. “The vast majority of people still drive a gasoline car and have their home connecting to gas or oil.” 

Still, there may be related investment opportunities in the future. “While there are provisions to make products like solar panels and electric cars more affordable to the middle class, the actual heavy lifting that needs to be done is in the area of building up our infrastructure to support those types of products,” said Bradley Newman, lead financial advisor at Fort Pitt Capital Group in Harrisburg, Pa.

In time, he said, it may be worth taking another look at related industries, such as “the companies that will build out the necessary infrastructure, or those that supply the components, like batteries or microchips."

Better stock dividends?
The act will impose a 1% tax on corporate stock buybacks. “Buybacks are an indirect way of returning profits to stockholders, which in turn increases the company earnings and therein increases the share price,” said Jay Freeberg, a partner at JRF Asset Advisors in New York City.

If the new tax makes companies rein in their buybacks, many of them may choose to reward shareholders in another way. “We will likely see companies increasing their dividends, so that they do not keep too much cash on their balance sheets,” said Freeberg.

“It is reasonable to assume that companies would redirect some of their stock buyback resources to increase their dividends or reduce their debt,” said Newman at Fort Pitt Capital. “For companies who continue to use the stock buyback approach, the result will not likely be lower-cost goods and services.”

Sizemore at Interactive Advisors and Sizemore Capital Management compared the buyback tax to the reduction in dividend taxes that came with the Jobs and Growth Tax Relief Reconciliation Act of 2003, during the George W. Bush administration. That caused “a huge spike in popularity” of dividend-paying shares, he said. “History could repeat itself here.”

Nevertheless, others are dubious. The act doesn’t change the playing field enough to make much difference, they said. “I’m not sure about the impact of the 1% tax, if there is one,” mused Pisano at Biondo Investment Advisors.

Tax implications
What’s more, the act will also provide some $80 billion in new spending for the IRS over the next 10 years, more than half of which is intended to beef up the auditing—particularly of high earners (companies and individuals who make more than $400,000 annually).

But should advisors change the ways they help their high-earning clients prepare their taxes? Not necessarily.

“We are expecting some of this money to trickle down to better enforcement and oversight of corporate retirement plans,” said Freeberg at JRF Asset Advisors. But he expects no changes in how advisors help high-earning individuals.

That’s partly because the IRS has been so cash-strapped that the increased funding will be a drop in the bucket. “Even with an influx of $80 billion in new funding, the agency’s ability to transform itself is far from assured,” reported the Washington Post.

Pisano at Biondo Investment Advisors agreed. “There’s just not that much that was signed into law that is going to significantly alter the tax planning we have been doing and will continue to do,” he said..

Instead, he’s more attuned to the expiration of much of 2017’s Tax Cuts and Jobs Act, which could raise tax rates in 2025.