U.S. Default, End of Social Security: Time to Prep for the Worst?

Catastrophes are often called "black swan events." We hear a lot of people worrying these days about such possible flying-off-the-financial-cliff moments: the U.S. government defaulting on its debt, the end of Social Security — AI causing the collapse of the economy. This type of tragic setback is as rare as a raven-colored swan.

I'm not so worried about ChatGPT or Bard being the masterminds of overthrowing humanity; the AI brains can't even tell you what time it is. (Just try it.) But the other things are a concern.

Throw in the possibilities of a recession, a widespread banking crisis or a whole web of worry surrounding geopolitical risk, including Russia/China and Ukraine, then it feels like we're swimming in a deep pond of black swans.

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Black swan events: not worth the worry

It's easy to get caught up in the angst and worry about the latest looming calamity.

Will Social Security lose its funding? It's an issue that needs to be addressed, but we've been on the brink of a depleted Social Security trust fund before — in the 1970s, again in the '80s and the '90s. Basically, the long-term projected balance of the trust fund has been uncertain ever since.

It's a similar scenario with the looming national debt default. Most recently, the U.S. was on the brink in 2011, 2013 and again in 2021.

That's not to say that these financial mishaps won't happen, or that we won’t endure a calamity that's not even on our radar. Black swan events, by definition, are impossible to predict. Rather than treading water anxiously on the alert for black swans, worrying about things out of your control and problems you can't solve, here are some strategies to reinforce your personal long-term financial situation now.

Protect your retirement savings

You'll likely have over a dozen different jobs in your working lifetime, according to a 2021 study of late-stage baby boomers by the U.S. Bureau of Labor Statistics. But each career move can put your life-after-work savings in jeopardy.

Our complicated retirement savings system often makes it difficult to transfer a 401(k) or other company-sponsored plan from your previous employer to your new one. Perhaps as a result, some people just cash out their old plan.

A study published in November 2022 by the Sauder School of Business at the University of British Columbia revealed that just over 41% of people withdraw funds from their 401(k) at job separation — and of those, nearly 90% drain the entire account.

"They take every penny out. Roughly two-thirds take it all out at once, and the rest make multiple withdrawals," noted UBC Sauder Associate Professor Yanwen Wang when the study was published. "But on average, within eight months, they take everything."

And the research says the withdrawals can't be fully explained because of financial hardship due to an unexpected job loss.

Of those who withdrew funds, only 27% had been laid off or terminated — it’s unlikely that all of them needed emergency funds, the study said. And to make things even worse, it's likely that many of those withdrawals triggered a 10% IRS penalty for taking the funds before age 59½.

A rollover to an IRA or — if possible — to a new employer's retirement plan is usually a much better idea.

Rollover your tax refund, too

Here's another rollover opportunity. That refund you get from the IRS is your money; it's not a gift or "found money." You likely paid too much in taxes through over-withholding or by making higher than necessary estimated quarterly deposits. Either way, it's been held without interest by the government.

Rather than spend the whole thing, think of it as a rollover. You're putting your money back to work for you. Sure, treat yourself with a slice of it if you like, but resolve to use most of your tax refund for "cash stuffing" longer-term goals.

Don't try to get lucky with your serious money

How did your March Madness bracket work out? Or even your Final Four? Those locks kinda blew up your parlay, huh? Good thing you weren't betting serious money. (You weren't, right?)

It's easy to get sucked into a betting mentality when investing, too. Maybe you're trying to get an edge, beat the market and catch up from a late start to saving. That's when you may be tempted to take a large stake in a single investment — perhaps the stock of the company you work for or the latest "can't fail" startup or crypto derivative.

But a loss in your long-term investment account hurts a lot more than blowing your beer money. Your life-after-work savings keeps you in the game of life. You're investing for what your life can be — what you want it to be.

But there is a way to attempt to "sweeten" the return on your investments. And that brings us to …

Consider a core and satellite strategy

The basics of asset allocation recommend a wide variety of low-cost investments spread across essentially all markets. A "core and satellite" strategy adds a tactical element to a portfolio.

Non-managed index investments achieve the goal of broad diversification with minimal expenses. That would represent your core strategy.

The "satellite" investments can be small purchases of actively-managed funds, individual stocks in specific sectors or perhaps an alternative investment or two. Cryptocurrency can be a satellite investment.

These small purchases provide an opportunity for concentrated exposure outside the broader market. For example, your core investments (allocated to equities, bonds and cash) might make up 90% of your portfolio, while any number of satellite holdings could account for the remaining 10%.

To set up such an investment plan, talk to a fiduciary financial advisor for investment recommendations and allocations appropriate to your situation.