Here's What Will Happen to Your Retirement Fund if Politicians Don't Raise the Debt Ceiling

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The U.S. has $31.4 trillion of debt, about $95,000 per citizen. The country spends a lot of taxes paying off interest on that debt. This year, the U.S. maxed out its credit line in January, meaning the Treasury has been paying off debt with whatever money it has on hand.

Financial shenanigans will continue until either Congress agrees to lift the debt ceiling, giving the U.S. more room to borrow money, or the U.S. defaults on its debt, with potentially catastrophic consequences.

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No biggie.

While a U.S. default is unlikely — financial experts like Suze Orman think the consequences of a default are too severe for Congress not to raise the debt ceiling — it’s worth considering why everyone is in such an uproar over the economic standoff between the Democrat president and Republican-controlled House of Representatives.

Retirees, in particular, could suffer from a debt default. They rely heavily on government-funded Social Security and invested retirement savings, which a default could devalue. Not even U.S. Treasuries, some of the safest places to store money, would be 100% safe from impact.

Here’s what will likely happen to your retirement fund if politicians don’t raise the debt ceiling.

Retirement savings may decline sharply in value

Should politicians not raise the debt ceiling, the U.S. will likely default on debt. That would be bad. Here are some consequences that might immediately follow a national default:

  • Rating agencies downgrade the U.S. credit rating.
  • The U.S. raises borrowing rates even further.
  • The U.S. economy plunges into a recession.

Credit agencies and investors worldwide will see the U.S. as less trustworthy if the U.S. defaults. That would hurt the confidence of investors and cause short-term market turmoil. This happened in 2011 and 2013, when the U.S. government failed to raise the debt ceiling until the last minute.

As trust in the U.S. economy weakens, investors could sell off U.S. bonds, leading to falling bond prices and raised rates. The economy typically weakens when the U.S. raises rates (like the Fed has been since last year), potentially frightening investors into withdrawing from the stock market — bad news for retirement funds.

As the market weakens and rates rise, the U.S. could plunge into a recession of interminable severity. Could be minor, could be major. Either way, recessions have historically hurt stock market returns — again, bad news for retirees.

None of these things would be good for retirement funds.

Social Security might get cut or delayed

Other consequences of a debt default include cuts in federal spending. Programs like Social Security could delay payments to retirees. It depends on how government leadership handles a blossoming debt crisis, and where Congress chooses to cut spending.

A default does not mean the U.S. would go bankrupt. Instead, the U.S. would need to re-negotiate debt repayments with creditors. That’s because the U.S. is a sovereign nation, and nations play by different rules than individuals and companies.

Can you default-proof your retirement fund?

Short answer, no. Longer answer: A modern U.S. default would be uncharted territory (previous financial crises were of a different flavor), and not even financial experts know precisely how badly a default would hurt retirement funds. But traditional investment advice still holds.

For example, diversification could help retirees prop up their retirement funds if the U.S. defaults. Should an entire asset class (i.e., the stock market) crash, retirees can lean on bonds and cash to pay the bills until the stock market recovers. Investing in property is also a viable option.

Don’t toss your retirement plans out the window because a default could happen — that’s doomer thinking. A default is unlikely. Congress has raised the debt ceiling over 70 times, a consistent pattern. Folks should stick to financial plans and focus on what they can control.

Consider sticking to tried-and-true retirement strategies that could help even in the unlikely event of a U.S. default. Diversify your 401(k) or IRA investments, and keep cash on hand to maximize your portfolio’s robustness.

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