After much drama, lawmakers may have finally settled on a deal to raise the nation’s debt ceiling. But for everyone from the retirees figuring out their future to students paying off their debt loads, the work and the headaches have just begun.
In general, most pros recommend against any knee-jerk moves. Still, there are certain areas that are more likely to be impacted than others. Below are a couple — retirement planning and the fate of the dollar — that could require new strategies in the months ahead.
Retirement planning. It’s not what the bill did — it’s what it didn’t do. Namely, it failed to extend the payroll tax cut passed in 2010, “which means unless separate legislation is enacted, workers will see their paychecks shrink in January when they have to start paying an additional tax of 2% on their earnings,” says James Horney, vice president of federal fiscal policy for the Center on Budget and Policy Priorities. (The cut was a one-year relief measure, so take-home pay ought to be about where it was a year ago.) In recent times, strapped workers have made up for their income shortfalls by taking out 401(k) loans: Vanguard reported a 14% uptick in 401(k) loans from 2009 to 2010; T.Rowe Price an 11% increase. And it might be also be tempting to make up for that cash shortfall by contributing less to your 401(k), but that can be a big mistake, says Michael Wall, founder of Wall Financial Group in Altoona, Penn. “It’s a compounding effect, so not saving that extra money can have a big impact on your total retirement savings,” he says.
The dollar. The resolution of the debt crisis brought an immediate rally in the dollar, with the U.S. dollar index rising 0.49% on Monday as a deal seemed imminent, but the rally was already slowing down by Tuesday morning, and the longer-term picture for the greenback isn’t so great. For one thing, the deal doesn’t appear likely to produce the kinds of savings that Standard & Poor’s had said were necessary to avoid a downgrade, according to a report by Camilla Sutton, the chief currency strategist for Scotiabank. The work that remains to be done on the debt problem combined with weak economic growth suggests the dollar will continue to weaken through the end of the year, Sutton writes. That’s bad news for travelers, but it could help some investors, says Kate Warne, U.S. investment strategist at Edward Jones. Investors who own stocks or funds in other currencies will see the dollar value of those investments rise if the dollar falls against other currencies, Warne says.