ICYMI: Washington Post (Column): "Investors, seniors are panicking over debt ceiling showdown"

Today, Washington Post columnist Michelle Singletary reported on the damage to American seniors and retirees that would be inflicted as "Republicans are risking pushing the nation into default and disrupting the global economy."

Singletary reached out to readers, whose responses confirmed the concern House Republicans have needlessly thrust on retirees. Some examples:

A disabled veteran from Indianapolis wrote, "To say that I am feeling stress over the disastrous possibilities is an understatement."

A retiree in Spirit Lake, Iowa wrote, "As a retired person, I fear both for Social Security and government bonds. But moreover, I worry about the country's reputation. The situation is a matter of paying our commitments. It is a total representation of the instability of government for a succeeding Congress to refuse to pay for bills passed by the prior Congress."

A retired public-school teacher in Michigan wrote, "I have a pension but also have savings, bonds, and mutual funds. It worries and angers me that the public has to endure the shenanigans of the people who supposedly work for us."

The President will reiterate to Congressional leaders at the White House next week that they must act quickly to avoid default without conditions, to prevent chaos and catastrophe for American seniors.

Read the full piece below:

Washington Post: Investors, seniors are panicking over debt ceiling showdown
[Michelle Singletary, 5/5/23]

People are scared that the debt ceiling showdown will end up slamming them financially.

And they are right to be alarmed. Republicans are risking pushing the nation into default and disrupting the global economy.

"I am more worried about the debt ceiling not being raised than anything else in life at the moment," wrote Jana Hutchins of Tempe, Ariz. "I have been retired for about a year and a half, and I have a long time to go to live on the savings I have accumulated over my lifetime. I fear it could be wiped out or so severely reduced that it will take more time to recover than what I might have."

The debt ceiling restricts how much money the federal government can borrow to pay its bills. And while it is gravely concerning that the government spends more than it takes in, this recent conflict is about spending that has already been approved.

"It's unfortunate that Congress is playing a game of chicken with so much at stake," said Christine Benz, director of personal finance and retirement planning for Morningstar. "But we've been here before, in 2011, and that time, at least, Congress managed to reach an agreement to raise the debt ceiling at the 11th hour. It seems unlikely that Congress won't do so this time around, but anything is possible, especially with the extreme polarization in Washington right now."

Consumer confidence is important right now, with the Federal Reserve still battling inflation and concern about a potential recession ahead. Then there were the spectacular failings of several major banks.

Nearly half of Americans are anxious about the safety of the money that they have at banks or other financial institutions, according to a Gallup poll conducted in April, the month after Silicon Valley Bank and Signature Bank collapsed.

I wrote about this issue earlier in the year, but now that the deadline for a deal is closing in, I thought it was important to address the anxiety people are feeling. I reached out to readers, asking how they felt about the looming debt ceiling crisis.

"To say that I am feeling stress over the disastrous possibilities is an understatement," wrote a disabled veteran from Indianapolis.

Jeff Leonhardt, a retired public school teacher in Michigan, wrote: "I have a pension but also have savings, bonds, and mutual funds. It worries and angers me that the public has to endure the shenanigans of the people who supposedly work for us."

For many consumers, the political grandstanding doesn't make economic sense.

Scott Helmers of Spirit Lake, Iowa, wrote: "As a retired person, I fear both for Social Security and government bonds. But moreover, I worry about the country's reputation. The situation is a matter of paying our commitments. It is a total representation of the instability of government for a succeeding Congress to refuse to pay for bills passed by the prior Congress."

Investors with U.S. savings bonds are contemplating cashing in, fearing the government will default. One reader with Series I savings bonds asked whether it makes sense to move that money to certificates of deposit that yield close to 4 percent.

Stop.

Don't make a move based on fear. Pause and consider what the following financial experts recommend. Here's what you should and shouldn't do.

Don't bail on your bonds

This debt ceiling drama may culminate in hair-raising last-minute deals, but don't make rash decisions, warned Carolyn McClanahan, a certified financial planner who founded the fee-only Life Planning Partners, based in Jacksonville, Fla.

To answer the question of the I bondholder wondering whether she should sell, the experts agree. Don't do it.

"We go through this every few years, and it generally gets worked out," McClanahan said. "CDs aren't any safer than I bonds, so if that is the reason she is switching, it isn't worth the hassle."

Series I savings bonds are still ultra-safe. They also offer valuable protection against inflation you don't get with CDs, Benz said.

It's also important to remember that if you have owned your I bonds for less than five years, you forfeit the last three months of interest.

Investors "would lock in a guaranteed loss in an effort to avoid a possible, and in my view, still unlikely, loss," McClanahan said.

Finally, given the volatility that the debt ceiling chaos may create for stocks, you should hold on to your bonds, said Russell Price, chief economist for Ameriprise Financial.

In the unlikely event there is a default, investors might rush to bonds because the stock market will probably see a significant drop, Price said.

"Initially, the safer investments might be fixed-income securities," he said.

Don't give up on the stock market

Fleeing when you are fearful is a natural response. But in this case, it would be unwise.

There's a low probability the government will default, but if you jump out of the market, you might see losses if, at the last moment, Congress increases the debt ceiling, Price said.

"People shouldn't be making significant adjustments," he said. "They shouldn't be overreacting."

Instead, play the long game if you're an investor.

"This kind of brinkmanship and uncertainty often cause volatility in stocks, which is why I like the idea of people having at least a 10-year spending horizon if they want to own them," Benz said. "That way, even if stocks go down and stay down for a while, you won't risk having to touch them when they're depressed."

Build a cash cushion

Make sure you have a good emergency fund to weather any short economic upheavals, McClanahan said.

Yes, you've heard this before. And yet we know many Americans don't have enough saved for a financial emergency.

"I like the idea of retirees and other people with short-term spending needs holding true cash instruments for their very short-term needs," Benz said.

Get rid of debt

Interest rates are rising, making debt more expensive. A default could make things much worse.

"The most important thing you can do is make sure you are as debt-free as possible," McClanahan said.

Diversify, diversify, diversify

If there was ever a time to embrace diversification, this is it.

You need cash, bonds and equities to help you weather this debt ceiling storm and any other economic calamity.

In addition to a rainy-day fund, Benz recommends having a mix of high-quality bonds — including government, corporate and mortgage-backed securities — that cover your short-term and medium-term spending needs from three to 10 years out.