If Congress doesn’t opt to raise or extend the nation’s debt limit, the United States may run out of the money needed to pay its bills. With this deadline approaching as early as June 1, SmartAsset asked financial advisors what they think will happen if the U.S. defaults and what they recommend clients do to prepare

For help navigating market volatility, consider working with a financial advisor.

Nearly 90 advisors from the SmartAdvisor matching platform participated in the survey. Respondents weighed in on what they think are the greatest threats to investors if the government defaults on its debt obligations. They also shared how investors can protect themselves against the possibility of a U.S. debt default.

What May Happen if the U.S. Defaults on Its Debt, According to Financial Advisors

Nearly 66% of financial advisors selected stock market volatility as one of the greatest risks to investors if the U.S. government defaults on its debt, the most of any potential consequence. Recently, economists and analysts have pointed to a stock market selloff and skyrocketing interest rates as default repercussions that could roil U.S. and global financial markets.

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“It would hurt municipal bond investors and equity/bondholders in the banking sector,” one financial advisor wrote. Investors in these sectors may feel the impact, specifically, if the government struggles to repay bond investors and Americans lose faith in banking institutions.

The second-largest concern was a downgrade of the U.S. debt, according to 46.43% of respondents. A U.S. debt downgrade could impact investors in government-backed investments such as bonds and affect how foreign investors view the safety of U.S.-backed investments, among other consequences. Another 40.48% of participants chose a potential recession as a potential default result. Recessions carry far-ranging risks from high unemployment to plunging stocks.

How Can Investors Protect Themselves Against Possible U.S. Default? Advisors Say ‘Ride It Out’

In the survey, 44.05% of financial advisors recommend "riding it out" as a method to protect against a U.S. debt default, making it the most popular answer. While this may sound like a hands-off approach, some advisors noted that proper asset diversification, appropriate allocation and a long-term perspective can help investors weather near-term economic shake-ups.

Advisors also pointed to shoring up financial safety nets and good financial housekeeping as strategies to prepare for a potential default. These moves may help investors prepare to endure the economic fallout from a default. Among survey respondents, 42.86% chose “reduce living expenses” and 34.52% chose “save more cash.”

Will the U.S. Government Default on Its Debt?

The U.S. hit its $31.4 trillion debt ceiling earlier this year. Since then, the Treasury Department has been using “extraordinary measures” – for example, suspending investments in certain governmental funds – to meet its payment obligations. But Treasury Secretary Janet Yellen has warned that those measures may be exhausted as soon as early June. Meanwhile, politicians on Capitol Hill debate whether and how to cut spending or increase revenues.

While no financial advisor, politician or political pundit has a crystal ball, a debt default would certainly be a major event for U.S. markets. Some folks worry that the government would fail to pay recipients of Social Security, veterans’ benefits and other federal programs. Others note that this event could slam financial markets and plunge the U.S. and other countries into a financial crisis.

Bottom Line

Financial advisors are eyeing stock market volatility and other large-scale impacts of a potential U.S. debt default. They point to good financial housekeeping, including saving, reducing expenses and using proper asset allocation, as ways people can protect themselves in the event of a default.

Methodology

Survey data for this report was collected by SmartAsset between March 29, 2023, and April 12, 2023. SmartAsset asked financial advisors these questions:

“What are the greatest risks to investors if the government defaults on its debt obligations?” and "How can investors protect themselves against the possibility of a U.S. debt default?"

Of the advisors surveyed, 84 responded to these questions.

Tips on Investing During Market Volatility

• One of the benefits of working with a financial advisor is having someone who can temper an investor’s emotional responses to economic uncertainty with objective analysis. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Use SmartAsset’s no-cost asset allocation calculator to get a quick estimate of how best to adjust your investment portfolio in light of your timeline and risk profile.

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Questions about our study? Contact press@smartasset.com.

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