As of last Thursday, America has hit its Debt Ceiling. Here’s what it means for your retirement portfolio.

The federal debt ceiling has a limit set by congress. Each year, the amount of money that the US Treasury can borrow in order to fund the government's operations is decided. The money goes towards things like making interest payments to people and institutions who own US government bonds.

On January 19, 2023, the U.S. hit its debt ceiling of $31.4 trillion. This is now raising economic concerns on what is to come. Many are unsure of the outcome if the U.S. defaults on its debt due to disagreements in congress. Read on to learn how the debt ceiling fight could impact you.

What it Means for Your Retirement Plan

The national debt has significant implications for retirement, as it can affect the stability of the economy as well as the value of investments like stocks and bonds. 

As we’ve seen, when the government borrows more money, it leads to inflation, which erodes the purchasing power of retirement savings. Additionally, when the government is unable to manage its debt and defaults on its loans, it leads to a financial crisis that could have a severe impact on retirement savings.

It's also important to note that when governments spend more than they earn, the budget deficit increases. As a result, in the long term the government will have to increase taxes or cut spending to balance their budget which could negatively impact the economy and retirement savings.

Financial Markets and 401(k)s

If the U.S. defaults on its debt, the value of bonds, equities, and the U.S. dollar will be threatened. This would lead to higher interest rates, inflation, and potential recession. This would be very bad news for financial markets and anyone with a 401(k). 

It is  a very unique situation to be in, because it hasn't happened before. In years prior to 2023, there have been many similar standoffs to raise the debt ceiling. It is now a major cause for concern as it nears reality.

A default would cause investors to lose confidence in the country’s ability to pay its bonds, which before this, have been viewed as some of the safest investments available.

Social Security and Medicare Recipients

The federal budget for 2022 included $1 trillion for Social Security and almost $760 billion for Medicare.These two programs represent two of the largest funded programs by the government. If the government defaults on its debt, it would cause delays in these programs, along with veterans benefits and SNAP (food assistance).

House Republicans have begun discussing spending cuts to these social programs.Though the party is far from united behind that strategy. Lawmakers will likely prioritize funding Social Security and Medicare because they are popular with a key voting block—older Americans.

Filing Taxes

The tax return process should carry out like normal. The 2022 filing period for the Internal Revenue Service (IRS) is from Jan. 23 to April 18. The IRS estimates that taxpayers will receive their tax refunds within 21 days of filing their taxes electronically, which is good news for taxpayers because any effects from the debt ceiling fight likely won’t happen until June or later.

For 2023, the IRS will announce their adjustments to tax brackets in October/November, along with new tax provisions. These annual updates adjust taxes to keep up with the cost of living, so depending on inflation this fall, the adjustments for 2023 could be small or significant.

Government Employees

The government could be suspending investments in federal pensions in order to keep borrowing funds. The Federal Employees Retirement System is considered to be one of the best retirement plans available. It is reserved for nearly two million civilian federal employees. It's important to note that pension investments should be made whole once the debt ceiling crisis is resolved.

Most federal employees are familiar with government shutdowns, like the one that happened in 2018-2019. The government shut down for 35 days, which is still the longest time in U.S. history. 

Final Thoughts

In summary, the national debt ceiling is an important issue that has the potential to affect retirement savings and the overall economy. It's important for individuals to stay informed about the government's debt situation and its potential impact on their retirement plans.

One thing is for sure, be smart with how you spend and invest your money these next few months. Even though most Americans wouldn't see the debt ceiling effects until June of this year, it's essential to know how you can help protect your nest egg. 

At NJM Wealth Preservation Strategies, we recommend revisiting your investment strategies and planning for a future that includes inflation protection strategies and national debt protection strategies

Your trusted Fiduciary Expert at NJM can assist in walking you through your investments in order to have a better understanding of what your current financial plan looks like & how to structure a portfolio of health & longevity to keep up with all of your goals. 

If you're interested in learning more about our financial strategies in these volatile times, contact us here today.