From Social Security to investments, how to prepare for a default

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With less than a week to go before the United States defaults on its debt for the first time in history, opinions between the White House and congressional leaders are far apart over the deal.

Fail raise the debt ceiling would Wreak havoc on the US economy and on Americans’ personal finances.

Sources say House Speaker Kevin McCarthy said in a closed session on Tuesday that “we’re nowhere near an agreement.” A default could affect everything from Social Security payments to the flow of money around the world.

But even in the face of a possible, unprecedented global economic crisis, Americans can take steps to protect themselves from some of the effects.

In this way you can prepare for a possible payment default.

The approximately 66 million retirees, workers with disabilities and other recipients of Social Security benefits should brace themselves for possible delays in their monthly checks.

Many of these people rely heavily on these funds for their livelihoods, including groceries, rent, utilities, and health care. The average pension for retired workers in 2023 is $1,827 per month.

According to the National Committee to Preserve Social Security and Medicare, nearly two-thirds of beneficiaries rely on Social Security for half of their income, and 40% of beneficiaries have at least 90% of their income from payments.

“Beneficiaries have earned their benefits through a lifetime of hard work and depend on their benefits,” Max Richtman, the committee’s CEO, wrote to lawmakers last month. “These payments are at risk of not being paid on time or in full for the first time in our country’s history.”

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However, it is possible that the Treasury Department could continue to make timely payments because of the entitlement program’s trust fund, said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

Benefits are paid out four times a month, on the third day of the month and on three Wednesdays. Around $25 billion is spent weekly, according to the Congressional Budget Office.

Delays in payroll payments may be occurring for some Defense Department employees – including 1.4 million on active duty Military personnel and more than 2 million civilian federal employees. As CNN previously reported, federal government contractors could also experience delays in payments, which could impact their ability to compensate their workers.

Military members should make sure they have extra cash and that their emergency fund is boosted to survive a missed paycheck, Mike Hunsberger, Next Mission Financial Planning owner and Air Force veteran, said CNN. If you have a tight budget, Hunsberger recommends checking again to see if there is anything to be cut, at least temporarily.

In every military service, there is an organization that can help with temporary loans for those who might be in need — like a car breakdown or an emergency ticket home because of a death in the family, Hunsberger said. Some military-leaning banks might also be helpful.

Those receiving veteran benefits should also have an emergency stockpile prepared — disability payments and pensions for some low-income veterans and their survivors could be hit by a shortfall.

Bond investors should also expect volatility during contract negotiations. US Treasuries are considered the safest assets in the world as they are backed by the full confidence and creditworthiness of the United States, but uncertainty over a debt ceiling agreement adds to the risk.

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When it comes to government bonds, the key question is when investors will get their money back, not if.

Experts believe that even if the US briefly surpasses the X date, the issue will be resolved quickly and the government will live up to its obligations, CNN reported.

If you invest in bonds, pay attention to when your Treasury bills mature.

Those who have invested in Treasury bills maturing on or immediately after June 1 and who definitely need their money by that time — to pay their own bills, for example — might consider selling those notes now and in Investing in debt securities that mature earlier, Collin Martin, director and fixed-income strategist at the Schwab Center for Financial Research, says suggested in an interview with CNN.

And if you’re interested in bond funds, make sure the bond portion of your portfolio has sufficient exposure to medium- and longer-dated bonds and isn’t overly skewed toward higher-yielding, short-term bonds.

Stay away from junk corporate bonds or emerging market debt, as previously reported by CNN. After all, if the US defaults, risky debt will come under the most pressure.

“If you need to borrow money, you need the confidence of the markets that lend you money,” Martin said.

“Our overall recommendation is that investors maintain a balanced portfolio consistent with their objectives and remain disciplined. A long-term perspective is especially important in times of uncertainty,” Vanguard spokeswoman Jessica Schifalacqua previously told CNN.

According to Moody’s Analytics, stocks could lose up to a third of their value even if a deal is reached, which would eliminate $12 trillion in fiscal debt.

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Review your stock-to-bond allocation and make adjustments as necessary, advises Martin. According to a report by CNN, stocks, which are riskier assets than bonds, are likely to become more volatile as the deadline approaches.

If the US defaults, the problem must be solved, experts say. And when it does, there will be a “relief rally” in the market, eToro US investment analyst Callie Cox previously told CNN.

However, after a deal, there could be an immediate period of correction as the Treasury replenishes money it burned when it couldn’t borrow money, Michael Reynolds, vice president of investment strategy at Glenmede, told CNN.

Investors might be tempted to buy the decline, but there are “so many other strains weighing on the economy,” Cox said.

“You don’t want to invest too much when there’s a recession on the horizon,” Reynolds said. In his view, it’s only worth taking advantage of a market sell if the S&P 500 falls below 16% of its current value.

Short-term investors should be even more cautious, experts said.

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