Will the deficit ruin my retirement?
My wife and I worry about the huge national debt, the trade deficit and the high level of borrowing most Americans have taken on. What effect will it have on our retirement?
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (CNNMoney.com) - My wife and I are 40 and we put about 13 percent of our yearly income into our 401(k) and Roth IRAs. We worry, however, when we read about the huge national debt, the trade deficit and the high level of borrowing most Americans have taken on. What effect will the spending habits of others have on my retirement -- and is there anything I can do about it?

-- William Lohr, Frederick, Maryland

I can certainly understand your concern. Hardly a day goes by that some Cassandra or another isn't predicting that the overheated housing market is about to melt down or the incredible expanding trade deficit is going to sink the U.S. dollar or that the U.S. and all its citizens are going to drown in a sea of debt -- or that all these things are going to happen at once in some Apocalyptic nightmare.

But while I think issues like the growing level of debt, the trade imbalance and sky-high housing prices are certainly things that deserve serious attention, I wouldn't get too obsessed about them for several reasons.

It's not time to panic just yet

First, I'm not sure that there's a consensus about just how alarming some of these trends are. Take the rising level of debt among American households. Yes, I'm sure it's at a record level and that paying off that debt takes more and more of our income.

But the other side of consumers' balance sheets -- the asset side -- is also expanding. In fact, Americans' overall net worth (how much we own after subtracting what we owe) is at record levels. (For the latest net worth figures from the Federal Reserve figures, click here, download the Balance Sheet tables and see page 1, Table B. 100.)

The other reason I'm not sure it makes sense to get too obsessed about this is that, even if everyone were to conclude that economically the U.S. is headed toward disaster, it's hardly a foregone conclusion that we're locked inexorably on a course to doom. While people talk as if the federal budget deficit and the trade deficit will only get bigger, at some point their growing heft will likely lead us to take corrective measures -- or the market will do it for us.

Plan for your own situation

When it comes to planning your own retirement, however, I think it's very difficult to factor such Big Issues into your overall strategy. I mean, should you be plowing most of your money into gold because you think a rising budget deficit will lead to higher inflation? No. That would be foolish.

I think you're already doing the most important thing that you can -- that is, saving a part of your income so you'll have a decent nest egg at retirement.

The core of your retirement strategy should be stocks or stock funds, since over the long haul they tend to provide returns large enough to keep the purchasing power of your savings growing faster than inflation. You also want some bond funds for income and stability. (For specifics on how to create such a strategy, click here.

Beyond that, I have no problem putting a small portion of one's assets in TIPS (Treasury Inflation-Protected Securities) or a natural resource fund or REITs (real estate investment trusts) to provide a bit more diversification and some more protection against inflation, whether it stems from a growing budget deficit or some other cause.

And I also think it's a good idea to have a bit of one's stock holdings -- say, 10 to 20 percent -- in foreign stocks (or, more likely, funds that invest in foreign shares). Again, you get extra diversification that can help dampen the volatility in your portfolio, plus returns on foreign shares will get an additional boost if the U.S. dollar loses value.

But aside from continuing to save and building the type of portfolio I've just described I'm not sure there's a whole lot you can do, except, perhaps, voting for politicians whose policies you think can better set the stage for economic growth.

At the risk of sounding cynical, though, I'd certainly put more faith in saving and investing than in politicians' policies.


More recent Ask the Expert columns:

Early retirement can be yours

Payments for a lifetime Top of page

Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.
Manage alerts | What is this?