Will the Inflation Reduction Act Really Break Rising Costs?

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Will the Inflation Reduction Act Really Break Rising Costs?

Will the Inflation Reduction Act of 2022 live up to its name in 2023? And what does it mean for your nest egg?

The Inflation Reduction Act, passed by Congress and signed by President Joe Biden last year, makes historic investments to address climate change and contains the most sweeping health care reforms in a decade. The policies in the law are monumental on a national scale, reducing the deficit by $300 billion and standing up programs to spur the transition to clean energy and lower prescription drug prices. The act also provides near-immediate, tangible benefits for American families by lowering costs for home energy, new vehicles, health coverage, and prescription drugs.

From a tax perspective (increased funding to the IRS aside), the recently passed Inflation Reduction Act of 2022 is mostly made up of provisions that affect business taxation while expanding energy-related credits. There are, however, a few areas of the law that could affect personal financial planning more directly, most notably around retirement and health care costs.

How Will the Inflation Act Help Retirees?

Retirement planning is an important aspect of financial planning that involves creating a strategy for saving and investing enough money to live comfortably during retirement. One of the key considerations when creating a retirement plan is to estimate the amount of money that will be needed to cover expenses during retirement, taking into account factors such as inflation and life expectancy.

One of the major concerns when planning for retirement is how to deal with the rising costs of goods and services over time, known as inflation. Inflation can erode the purchasing power of savings and investments over time, making it more difficult to maintain a desired standard of living during retirement. The Inflation Reduction Act is a proposed legislation that aims to tame rising costs by implementing policies such as price controls, a balanced budget amendment, and an automatic trigger for spending cuts.

Medicare Benefits

The most noteworthy and exciting news for retirees and near-retirees is the act’s provisions around prescription drug prices for Medicare Part D enrollees. While most of the provisions will be phased in over the next four years, the new law gives Medicare administrators the power to negotiate pricing on the most-prescribed drugs, in addition to capping total out-of-pocket drug costs for consumers.

Perhaps the biggest relief for many retirees will be the $35 monthly cap on insulin costs, which goes into effect in 2023 and lasts in its initial form until 2025. For 2026 and beyond, the monthly price of insulin will be limited to 25% of the negotiated cost by Medicare or the plan price, whichever is lower.

Generally speaking, these changes don’t necessarily call for immediate or large adjustments to the financial plans of retirees, apart from those who currently plan for out-of-pocket drug costs far in excess of the $2,000 cap that will be in place in 2025 with possible increases going forward.

Is the Inflation Reduction Act Enough? Probably Not.

It it is yet to be seen if the Inflation Reduction Act will be able to effectively tame rising costs. While price controls and spending cuts may help to reduce inflation in the short term, they may also have negative consequences in the long term, such as reduced economic growth and decreased investment in productive industries.

Additionally, inflation is a complex phenomenon that is influenced by a variety of factors, such as changes in monetary policy, global events, and supply and demand conditions. Therefore, it is unlikely that any single policy or piece of legislation will be able to completely eliminate inflation.

Given this, it’s important for retirees to consider a diversified portfolio of investments, including stocks, bonds and real estate, which historically have been able to keep up with or beat inflation. Additionally, it is also important to plan for a retirement that is flexible and adaptable to changing circumstances, in order to be able to adjust to unexpected events such as inflation.

Final Thoughts

In conclusion, while the Inflation Reduction Act may help to reduce rising costs, it is unlikely that it will be able to completely eliminate inflation. Therefore, retirees should consider a diversified portfolio of investments and a flexible retirement plan in order to be able to adapt to changing circumstances, including inflation.

And while there is much to take advantage of here, there are also provisions to be wary of. To help make the best of the new tax changes, talk to your retirement income advisor at CKS Summit Group.

We offer professional services in several areas of financial planning such as: retirement income planning, wealth management, tax efficient strategies, asset protection, legacy planning, and IRA & 401K rollovers.

Schedule your personal strategy session to work with one of our financial planning experts on your plans for retirement today.