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U.S. Credit is Now on Rating Watch Negative

May 31, 2023 | General Financial PlanningThrift Savings Plan (TSP)

As time ticks on with the national debt ceiling issue remaining a problem, there are increasingly greater concerns among Americans.

But now the concerns have reached beyond just the public. Fitch, one of the top three credit rating agencies, has put the U.S. on a negative rating watch, meaning the U.S. is at risk of being downgraded as the agency’s concerns increase.

Fitch issued a statement, “​​The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits, and a growing debt burden signal downside risks to U.S. creditworthiness.”

The United States’ ability to pay its bills on time is a cornerstone of the financial system. The U.S. has largely upheld its creditworthiness of not defaulting on its loans.

But even if we see some form of resolution in the next couple of weeks, Fitch’s rating watch points to a greater issue: we’re not solving the problem permanently.

This rating watch is not about whether negotiations will be able to keep us out of default in the near-term, and Fitch’s new position is alluding to the issue at hand.

Without getting political, getting to a resolution does not mean that we have a solutionFitch sees the greater picture and raises concern over the long-term impact of an increasing debt ceiling.

How Federal Retirees Should React

With most things financial planning, reacting to the markets or the news is typically the wrong decision. Generally, by the time you see something in the news or reflected in market performance, you’ve missed the boat. The reason you’re seeing the markets react is because the institutional managers have already placed their trades.

But that doesn’t mean that tactics should be thrown out. Sometimes tactical moves are required even within the grand strategic plan. U.S. Treasury bonds have always been seen as a haven for low-risk investment options.

In fact, in economics, the term “risk-less” or “risk-free” assets can only be referred to when discussing debt obligations (bonds) of the U.S. government, because the “full faith and credit” of the United States backs the debt.

Folks, we’re not fear mongers. But being realistic is a core tenet of financial planning. The importance of having a plan that addresses what you’ll do in situations of increased risk cannot be overstated.

Ask yourself the following questions:

– How heavily do I rely on US Treasury bonds for stability and/or income?

– How well diversified is my fixed income (bonds) portion of my overall portfolio?

– What will the impact of a default in any kind of bonds do to my plan?

– How will a possible default impact the rest of the markets? Am I prepared?

These questions are helpful in stress testing your retirement plan. The ability to maintain consistent cashflow is the heartbeat of your financial independence.

Disruptions brought forth by the economy, the markets, or defaults from large issuers of debt obligations (bonds) could cause challenges in your plan. Even if the U.S. can find resolution, how has its general credit worthiness been impacted? And how will this impact the overall markets over time?

Over the years of helping federal employees with their retirement, we’ve never seen a retirement plan fail overnight. The issues creep in over time and begin to weaken a plan’s sustainability. Your job is to be able to identify what those issues are and course-correct them along the way.

Sometimes it means reducing your overall risk. Sometimes it’s pivoting into a new economic season. The way to find out what is capable of breaking your retirement plan is by stress-testing.

If you can incorporate “What-If” scenarios into your retirement plan, you can be better prepared for the outcomes well before anything happens. And if you don’t like the way things look, you have plenty of time to make changes to redirect your trajectory.

At our firm, we’ve been way ahead of this U.S. debt issue and began pivoting our clients into other high-quality vehicles. This isn’t a recommendation, but as a reminder that the economy goes through cycles and federal employees need to remain nimble.

While Treasury bonds have been a solid choice for certain jobs your portfolio has,  it stands to reason to diversify in other parts of the markets. Federal retirees should consider what other investment instruments are available as tools to help them continue their path towards their ideal future.

Remember that investments are just that: tools. The question always remains—which ones are best for the job at hand and under which circumstances?

Use this moment of temporary concern to motivate yourself to look deeper at your plan. If you’re not comfortable with how things could pan out, then make sure you don’t put off getting your plan in order. After all it’s not just your money, it’s your future.