May 24, 2023

5 Things to Know About the Debt Ceiling, #150

16 minutes

In January of 2023, the United States reached its debt ceiling, sparking concerns that we could default on our debts as early as June 1st. To navigate the debt ceiling crisis, I’m sharing five insights to help you understand what the debt ceiling is, what happens if that limit is breached, how the debt ceiling affects your retirement funds, and the risks of timing the market.

You will want to hear this episode if you are interested in...

What is the debt ceiling? [2:37]
What happens if the U.S. breaches the debt ceiling limit? [3:26]
How would a U.S. debt default impact my retirement savings? [6:02]
Why you shouldn't try to time the market [8:18]
Additional consequences of the debt ceiling crisis [13:01]

Understanding the debt ceiling

In order to understand how the debt ceiling crisis impacts your retirement portfolio, we first have to know what the debt ceiling is and how it works. The debt ceiling is the maximum amount of debt that can be incurred by the U.S. Treasury to cover the United States financial obligations as set by law. This debt includes borrowed funds used to pay for things like Social Security, Medicare, and interest on the national debt. Unfortunately, the debt ceiling has been raised 78 times since 1960 and increased under every presidential administration since 1933.

So where is all the hype coming from over the current debt ceiling crisis? Well, politics certainly play a role. Even with the House passing a bill to raise the debt ceiling and cut government spending in April 2023, it’s doubtful whether the barely passed legislation will put a dent in the problem. One of the main contributors to U.S. debt in recent years was the government-sponsored COVID-19 Relief Programs that printed billions of dollars into circulation. As of January 2023, the current debt ceiling sits at $31.4 trillion, begging the question: How will the United States meet its obligations?

What to do if the ceiling breaks

There are some potentially drastic repercussions for the economy if the U.S. defaults on its debt in the coming months. Companies that were supposed to receive money from the government won't, which could force them into layoffs and spending less money on investments that drive the economy. And slowing corporate growth could lead to a decrease in the U.S. gross domestic product (GDP). Breaching the debt ceiling could also decrease investor confidence, inciting a selling frenzy and a resulting market plummet.

That last sentence may make you feel like getting your money out of the market, but I would strongly urge you to reconsider. Timing the market sounds easy enough: Buy low, sell high, and wait to buy low again. The problem is that it rarely works out that way because markets are so unpredictable. Things go up and down at the drop of a hat. It’s far better to stay invested and ride the wave, taking short-term losses when you can, and repositioning as needed. But don’t get out! By missing just 10 of the market’s best days, you’ve already cut your investment in half! Listen to this episode for more tips on navigating the debt ceiling crisis.

Resources Mentioned