Would A US Default Derail Your Retirement?

I'm getting more questions these days from people about how a potential default by the US government would impact their retirement plans. And it's a tricky question to answer because you don't want to alarm people, but you also want to give them an honest assessment of what it would mean.

So let me put this in terms that are easy to understand. This analogy may sound a bit extreme, but you should know what the financial markets already know about this issue.

• Let's say you're going on vacation, and when you get on the plane, you pop your head into the cockpit and ask the captain how your trip might be affected if both jet engines fall off the plane. That's the impact a true default would have on your retirement plans. It would be a financial disaster for the economy and the markets, and it would make it pretty tough for any of us to retire.
• Treasury bonds are the foundation of our entire global financial system. It's like those engines on the plane. The plane only flies if those engines work. If they fall off, we've all got a big problem.

Rest assured that people at the highest levels of our government know this: the President knows this, the Treasury knows this, the Fed knows this, and the leadership in Congress knows this. In fact Timothy Geithner, the Treasury Secretary, has been out in the media telling people the exact same thing, that a default would be a catastrophe.

That's why I'm not concerned about the ultimate outcome. It makes absolutely no sense to default on our debt. If we want our economy to function (and we all want to keep our jobs and preserve the value of our retirement plans), we have to pay our national debts. So the US must ultimately pay its debts as promised.

Now you might be wondering how we can pay our debts if we're running out of money. Well, there's a great deal of misinformation out there about the budget deficit as it relates to our Treasury debt.

First, we have plenty of money to pay the debt. Interest payments on US debt are only about 6% of the budget. So there's no question that we have enough money to make the payments.

Moreover, the US government can easily pay the interest on Treasury bonds even without raising the debt ceiling. If we didn't raise the debt ceiling, the debate would turn to the question of whether we pay Treasury obligations first before we pay anything else. And everyone in the world of finance knows the answer has to be yes. That's because the consequences of not paying it would be severe for the US economy.

When you think through it, it would be financial suicide not to. First, if you don't pay the interest, then you only save the government 6%. The US government borrows 40% of every dollar it spends. So not paying the interest doesn't balance the budget. All it does is cause the economy to collapse; not a good strategic choice.

This sounds simplistic, but when it comes to your investments, you must have a basic faith in the US government's promise to pay its debts. Just like if you want to fly, you have to rely on the airline's promise to keep you safe and not do something to intentionally crash the plane.

• If you're a concerned investor, then one of the best things you can do to protect your assets is to contact your local Congressperson and US Senator and tell them that you understand we have to pay our debts first.

Bottom line. A default would be devastating for the economy and wouldn't solve our budget deficit, so the US government must pay its debts.

Above material does not constitute investment advice. Consult your individual advisor prior to making any decisions. All investing involves risks, including but not limited to the risk of a permanent loss.
Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.

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