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.