STWS Advisor Jennifer Meyer comments on the looming debt ceiling crisis – is it time to start worrying?
Every time I turn on the news these days, I hear the dreaded “debt ceiling” is looming and will cause severe market turmoil if Democrats and Republicans cannot negotiate a resolution in the coming weeks. As an investor, it is normal to wonder- is this real? Should I move my money out of the market? Is this just a scare tactic in the divided world of politics? It is especially nerve-wracking for people hoping to retire in the coming few years. We all know the stories of the people planning to retire in 2008-09 who had to wait due to the extreme losses in their portfolios during the Great Recession. There is no doubt- it is scary to watch the news these days.
I do not know what the coming weeks hold for the markets; it would make sense to have additional volatility, as the markets greatest short-term enemy is uncertainty. For example, recall the start of the COVID-19 pandemic in March of 2020, the market dropped 30 percent within a few weeks. My conversations at the time were all about, “But Jen- we have never had a pandemic before, how do we know how this will play out?” All fair concerns at the time. My reply today is very similar- I do not know what the next few weeks and months hold. However, I do know that historically, the market has rebounded, and usually much more quickly than expected. By the end of April 2020, the market was already rebounding, and by the middle of August, the market had recovered most of those losses, and in November of 2020 the Dow passed 30,000 for the first time in history. In 2021, the S &P 500 ended the year with an almost 27% gain.
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“But Jen- I understand all of that, but if I am retiring in the next few years, shouldn’t I be protecting my investments?”
My response is that of course you need to be mindful. If you are planning to live on your investments to live on in the next few years, you should be considering your asset allocation more carefully than you may have in the past. It is critical that you have planned correctly for the drawdown of your investment portfolio. This brings me to the greatest problem for retirees planning to retire and draw from their TSP- the pro rata rule. In my opinion, this is the single biggest reason for moving money out of the TSP! If you are not familiar with the rule, in my experience, most federal employees are not, the rule means that TSP will take any funds withdrawn from participant accounts in proportion to how it is invested. So, if you have a diversified portfolio with money in all five funds (which you should), TSP will take any withdrawals in proportion to how they are invested. This means that in a falling market, you are forced to sell stocks. In a falling market you would like to draw from the G Fund only. TSP will not let you do that.
“Well, what if I put it all in G- problem solved!” Beware- if ALL your money is in the G fund, you have virtually no chance of keeping up with inflation over time. Not a good plan for a happy retirement.
Just like you, I will be watching the headlines over the next few weeks in hopes that Congress does their job. We know that political banter will lead to finger pointing, but the reality is that both Democrats and Republicans have overspent in the past few years. Both parties own this problem, and they must negotiate a resolution. I expect they will. It would do unimaginable damage to the U.S. reputation if they do not. I am not so naïve to think a default is not possible. But I do believe both sides will recognize the impact of not resolving this and will find a way to get it done.
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.