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As the US approaches the debt ceiling deadline, Dave Boniface is fielding calls and emails from elderly clients.

“The anxiety is growing pretty quickly,” said Boniface, a financial adviser at Legacy Capital, an affiliate of LPL Financial in Forest Lake, Minn.

Retirees are worried about how the economy will perform if lawmakers can’t agree on raising the debt ceiling, the legal limit on what the country can borrow to finance its operations. And they’re wondering if they should take steps to protect their portfolios, Boniface says. While the uncertainty is real and the anxiety understandable, it’s best not to take drastic action, he and other experts agree.

Most observers expect the political drama of the debt ceiling negotiations to end with a last-minute resolution. Still, the prospect of a debt ceiling breach and subsequent US debt default is a worrisome prospect for investors still reeling from last year’s steep market losses. Treasury Secretary Janet Yellen warned of an “economic and financial disaster” that would occur in the worst-case scenario.

The government hit its current debt threshold of $31.4 trillion on Jan. 19 and has since taken what Yellen called “extraordinary measures” to keep the government afloat. Yellen said the funds could run out soon, and the US risks defaulting on its debt as early as June 1 if lawmakers do not act within days.

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Retirees may be particularly vulnerable to market losses if they have to withdraw funds from a declining portfolio to make ends meet. Social Security payments can also be delayed if the U.S. defaults.

It can be tempting to pull your money out of the stock market and ride out any volatility. But that would be unwise, experts say. Even in the worst-case scenario, stocks will eventually recover. The market’s best days tend to cluster around its worst days, and you’ll miss out on most of the recovery if you sit on the sidelines.

According to research from JP Morgan Asset Management, over 20 years, missing the 10 best days results in an annualized return that’s about half of what you would have gotten if you had kept investing and not tried to time the market.

Many experts recommend that retirees always maintain a healthy cash cushion. Christine Benz, director of personal finance and retirement planning at Morningstar
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recommends that retirees keep between one and two years of the portfolio in cash. (Note, that’s the part of the cost that isn’t covered by Social Security or other income sources.)

Cash allocation will insulate your portfolio from market volatility. If the market goes down, you can use your cash and leave your investments alone. Exiting a declining balance will accelerate the depletion of your portfolio.

If you don’t have an adequate cash cushion, it’s not too late to fill it, says Benz. The Standard & Poor’s 500 is up nearly 8% for the year. You can sell some appreciated stock and strengthen your cash reserves.

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Boniface says it is confident its retiree clients have a reasonable runway for required distributions in low-volatility liquid assets. For distressed clients, he can raise an extra $10,000 to $15,000 in cash, even if it’s not financially necessary. Boosting liquidity makes them feel like they’ve done something proactive to protect their portfolio and will reduce the chances of exiting the market if the going gets tough.

“It’s only for the individual who knows they have their finger on the sell button,” Boniface says.

Email elizabeth.obrien@barrons.com

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