Wealth Management Spotlight

Understanding The National Debt, the US Debt-to-GDP, and Why It Matters for Investors

The U.S. national debt has soared to an unprecedented $35 trillion, growing by an alarming $2 trillion every year! 

The growth of the federal debt regularly dominates the headlines, raising questions about the nation’s fiscal health and the debt’s potential impact on our economic stability. For investors, this escalating debt isn’t just a number in the news — it’s a factor that can shape market conditions, interest rates, and portfolio performance.

While the sheer size of the debt is concerning, it’s important to keep a focus on its sustainability. The key lies in understanding how the cost of servicing this debt — measured as a percentage of Gross Domestic Product (GDP) — can affect government policy, economic growth, and market stability. 

Historically, low interest rates have shielded policymakers from feeling the full impact of rising debt, enabling expansive spending with limited fiscal restraint, but those days seem to be over. With interest burdens now returning to levels last seen in the 1990s, the U.S. faces a critical turning point.

As the global leader and issuer of the world’s reserve currency, the United States holds significant economic advantages. However, these advantages depend on responsible debt management and maintaining confidence in the dollar’s strength. The erosion of this confidence could have profound implications for global markets, economies, and investment strategies.

In this article, we’ll break down the current state of the U.S. national debt burden, examine how it impacts the value and role of the U.S. dollar in the global economy, and provide insights into what this might mean for your portfolio. By staying up-to-date and practicing proactive planning, you can navigate these challenges and position your investments for long-term success.

Key Takeaways

• The U.S. national debt has surpassed $35 trillion in 2024, with a debt-to-GDP ratio exceeding 123%, signaling rising fiscal pressures that influence market dynamics and investment strategies.
• Higher interest rates and inflation, driven by the growing debt, can impact bond yields, the stock market, and purchasing power, requiring proactive portfolio adjustments.
• Investing in global markets and inflation-protected investments can offer opportunities to hedge against domestic economic uncertainties and capitalize on broader growth trends.
• Diversification, tax-efficient strategies, and a longer-term perspective are essential for navigating the challenges of the U.S. national debt while positioning your portfolio for resilience and success.

Understanding the Current State of the U.S. Debt Burden

The best way to understand the U.S. national debt isn’t just by looking at the massive top-line figure, but by focusing on the U.S. debt-to-GDP ratio — a measure of how the federal debt compares to the size of its economy. Currently, the U.S. debt-to-GDP ratio is 123%, indicating that the country owes more than its entire annual economic output. 

For context, this ratio has grown steadily over decades, fueled by government spending, tax cuts, and historically low interest rates. The Congressional Budget Office (CBO) predicts that the federal government debt will continue to outpace the nation’s economic growth.

Breaking Down the National Debt: What Investors Need to Know

The U.S. debt is divided into two main categories:

• Debt Held by the Public: This includes Treasury securities and bonds owned by individuals, corporations, state and local governments, and foreign governments. It represents the debt that directly influences markets and interest rates. Most of the domestically held public debt is owned by the Federal Reserve.
• Intragovernmental Debt: Debt held by government trust funds, like Social Security and Medicare, which reflects the government’s internal financial obligations.

For you, as an investor, public debt is especially important because it impacts everything from interest rates to inflation to fiscal policy — all of which shape broader market conditions, and can affect your portfolio’s performance.

The Rising Cost of Borrowing

For years, low interest rates helped keep borrowing costs manageable, even as the debt grew; however, that is no longer the case. In fiscal year 2023, net interest payments on the national debt rose to 2.4% of GDP, and projections suggest future interest payments could reach 3.0% in 2024 — the highest levels since the late 1990s. This spike in the debt limit, or debt ceiling, limits the government’s ability to invest in other priorities, potentially creating ripple effects across the economy.

For investors, rising interest rates can mean higher yields on bonds, but they also signal potential challenges for equity markets and economic growth. Understanding interest rates and how they affect the stock market is crucial for investors to optimize their portfolios to efficiently navigate the market — and it is equally important for policymakers to understand the role of interest rates in their policy decisions.

Why the Federal Debt Matters

The U.S. national debt isn’t just a government issue, it’s an economic reality that can affect everything from the value of the U.S. dollar to the performance of investments. As debt levels climb, so does the cost of servicing it, which poses challenges for fiscal policy and financial markets alike.

The Debt-to-GDP Ratio: A Benchmark of Fiscal Health

Think of the debt-to-GDP ratio as a metric similar to the nation’s “credit score.” A high ratio signals that debt is growing faster than the economy, which can erode confidence in the government’s ability to manage its obligations. While the U.S. is not at the level of an economic fallout (like that of Argentina), this rising ratio seems to underpin our need for sustainable fiscal policies.

For investors, a high debt-to-GDP ratio can have real-world implications:

• Rising Interest Rates: As debt levels grow, so does the cost of servicing that debt. This puts upward pressure on interest rates, which affects everything from bond yields to borrowing costs for businesses and consumers.
• Reduced Fiscal Flexibility: Higher interest payments consume a larger portion of the federal budget, limiting the government’s ability to invest in growth-driving initiatives like infrastructure, research, and education.

The U.S. Dollar and Global Confidence

The U.S. dollar’s status as the world’s reserve currency is a cornerstone of its economic power. Since World War II, this privileged position has allowed the U.S. to borrow at lower costs and maintain a dominant role in global trade and finance. However, the rising national debt poses risks to this standing.

As debt levels grow and the debt-to-GDP ratio climbs, global confidence in the dollar could weaken. If investors or foreign governments begin to question the U.S.’s ability to manage its fiscal responsibilities, demand for the dollar could decline, potentially leading to currency depreciation, reducing purchasing power and making imported goods more expensive, and higher borrowing costs, further increasing the cost of debt.

Impacts on Economic Growth

Growing national debt, as seen through historical trends in U.S. debt by the year, also has broader implications for economic growth. When the government borrows heavily, it competes with businesses and individuals for available capital. This can drive up interest rates and reduce private-sector investment, which is critical for innovation and job creation. 

Persistent deficits and high debt levels can also contribute to inflation, eroding the real value of investments and reducing the purchasing power of households like yours.

Why This Matters to Investors

The federal debt directly influences market dynamics and portfolio performance. Rising interest rates, inflation, and economic uncertainty all affect asset values and investment returns. Understanding these factors can help you make informed decisions about how to allocate and diversify your investments, manage risk, and position your portfolio for resilience.

By staying proactive and working with a trusted financial advisor, you can navigate the challenges posed by the national debt and identify opportunities that align with your financial goals. At Towerpoint Wealth, we examine a myriad of market factors to help our clients navigate volatility and make informed decisions that align their investment strategies with their unique risk tolerance and financial goals.

Implications of National Debt for Investors

The growing national debt has far-reaching consequences that extend beyond the federal budget and the U.S. dollar. As discussed, when it comes to investors, the national debt directly impacts market dynamics, investment returns, and portfolio strategies. Understanding these implications can help you navigate the challenges and opportunities presented by today’s fiscal environment.

Rising Interest Rates and Bond Yields

As the government’s borrowing needs grow, it often raises interest rates to attract buyers for its debt. Higher interest rates can have a dual impact on your portfolio:

• Bond Markets: Rising rates typically lead to lower bond prices, which can negatively affect existing fixed-income investments. However, new bonds offer higher yields, creating investment opportunities for income-focused investors.
• Equity Markets: Higher interest rates increase borrowing costs for businesses, potentially slowing growth and reducing profitability, which may weigh on stock valuations.

Inflation and Purchasing Power

A growing debt burden, coupled with high inflation, erodes purchasing power. This can impact your portfolio by reducing the real value of investment gains, particularly for fixed-income assets. It can also affect inflation-sensitive sectors. While energy and commodities may see higher demand, others, such as consumer goods, may struggle with rising input costs.

Market Volatility

The growing national debt and its economic implications often contribute to heightened market volatility. As government borrowing increases and fiscal policies evolve, investors may experience more frequent and pronounced market swings. While this uncertainty can be unsettling, it also creates opportunities for those who are prepared.

To manage market volatility, it’s important to remember two key cornerstones of sound financial planning:

• Diversification: Spreading investments across asset classes and geographies to reduce risk.
• Long-Term Perspective: Staying focused on financial goals despite short-term fluctuations.

Opportunities in Global Markets

A rising U.S. national debt and the potential weakening of the dollar can create opportunities for investors to diversify internationally. When the dollar depreciates, foreign investments often gain value when converted back into U.S. dollars, enhancing overall returns. Additionally, global markets, particularly in emerging economies, may offer higher growth potential compared to the more mature U.S. market.

Key Strategies for Global Investing

• International Equities: Ask your financial advisor about established companies in developed markets or high-growth industries in emerging economies.
• Foreign Bonds: Consider diversifying fixed-income holdings with bonds from stable or growing foreign markets.
• Global ETFs and Mutual Funds: Look into simplified international investing with funds that offer broad exposure to global opportunities.

Proactive Strategies for Navigating the National Debt

As we have discussed, the growing U.S. national debt presents a complex challenge for the economy and financial markets. With the right strategies, however, investors can mitigate potential risks while capitalizing on new opportunities. Proactive planning, diversification, and informed decision-making are essential for navigating this evolving landscape. 

Here’s what that may look like for investors like you:

Diversify Across Asset Classes and Geographies

Diversification remains one of the most effective ways to reduce portfolio risk, particularly in an environment of economic uncertainty driven by rising debt. 

By allocating investments across various asset classes — such as equities, bonds, real estate, and alternatives — you can minimize the impact of market volatility on your overall portfolio. Diversifying globally can also provide exposure to international markets, which may benefit from a weaker U.S. dollar and offer higher growth potential in emerging economies.

Prepare for Inflation

High national debt levels often contribute to inflationary pressures, which can erode purchasing power and reduce real returns on investments. To protect your portfolio from inflation:

• Consider Investing in Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) and commodities, such as gold, can provide a hedge against rising prices.
• Consider Real Assets: Investments in real estate, commodities, and infrastructure often perform well in inflationary environments, offering both present income and potential appreciation in the future.

Optimize Fixed-Income Investments

Rising interest rates — a common consequence of increasing debt — can negatively affect existing bond prices; however, it can also create opportunities for new fixed-income investments. Investing in shorter-duration bonds, for example, can provide stability, as these are less sensitive to rate changes. Newly issued higher-yield bonds are another way to increase your income while balancing risk

Leverage Tax-Efficient Strategies

As the government addresses its debt, tax policy changes may follow, making tax efficiency a critical component of your financial plan. Some strategies to consider are:

• Maximize Tax-Advantaged Accounts: Contributions to IRAs, 401(k)s, and Health Savings Accounts (HSAs) defer or eliminate taxes on investment growth.
• Implement Tax-Loss Harvesting: Offset capital gains by strategically selling underperforming assets, reducing your taxable income.

Stay Focused on Your Longer-Term Goals

Short-term volatility caused by debt-related market fluctuations can be unsettling, but maintaining a disciplined, long-term perspective is the key to long-term wealth. Performing regular portfolio reviews with your financial advisor can help make sure you periodically reassess your asset allocation and risk tolerance to stay in alignment with your plan and with your goals.

Final Thoughts

The rising U.S. national debt is a complex issue, with historical data on U.S. debt by the year providing critical insights into its accelerating growth. 

This increasing debt has significant implications for the economy, markets, and your investments. While challenges like inflation, rising interest rates, and market volatility may feel daunting, they also present opportunities for proactive and informed investors.

By diversifying globally, protecting against inflation, leveraging tax-efficient strategies, and staying focused on long-term goals, you can position your portfolio for resilience and growth in an uncertain economic landscape.

At Towerpoint Wealth, we’re here to help you navigate these complexities with personalized strategies tailored to your risk tolerance and financial objectives. If you’re ready to take control of your financial future in the face of today’s challenges, we invite you to schedule a consultation with our team. Together, we can build a plan that helps you thrive, regardless of what the future holds.

Year-end tax moves to position you for success!

As the holiday season fills the air with giving and gratitude, it’s also the perfect time to give yourself the gift of proactive financial planning and minimizing your tax obligation to Uncle Sam. With 2025 on the horizon, the tax landscape may see significant shifts that could impact your financial goals. But the good news? There are things you can do today that can set you up for a more effortless, and less costly, tax season next year.

At Towerpoint Wealth, we believe the best gifts are the ones that keep giving, like a well-structured financial plan tailored to help you minimize your taxes and maximize wealth-building and wealth-protecting opportunities. That’s why this holiday season, we’re sharing six powerful year-end tax moves that you can consider to help you be better prepared for 2025. 

So, as you enjoy the festivities and reflect on the year ahead, take a moment to unwrap these valuable insights and talk with your tax and financial advisor about ways that you can minimize your tax liability as you prepare for the new year.

Key Takeaways

• Proactive tax planning is essential, as small adjustments made now can help reduce your tax burden and set the stage for long-term financial success.
• With the Tax Cuts and Jobs Act (TCJA) set to potentially expire, preparing for potential higher tax rates and a reduced standard deduction may be a critical step in maintaining financial stability.
• Strategies like Roth conversions and tax-loss harvesting offer effective ways to minimize taxes and increase financial flexibility for the future.
• Optimizing “asset location” by placing tax-inefficient investments in the most tax-efficient accounts can significantly reduce tax drag and enhance portfolio growth over time.
• Reviewing your estate plan now allows you to take advantage of the current estate tax exemption before potential reductions occur in 2025.

Manage Capital Gains Distributions

Capital gains distributions can be an unwelcome surprise during tax season, particularly for investors holding mutual funds in taxable accounts. These distributions happen when fund managers sell securities within a fund at a profit and pass those taxable gains to investors, even if you haven’t sold a single share. 

The result? A potentially unexpected tax bill that can feel especially frustrating in years when you haven’t sold anything, and/or the market or your portfolio is down.

At Towerpoint Wealth, we see this as an opportunity to take proactive steps that reduce the “tax drag” on your portfolio. By shifting investments prone to capital gains distributions into tax-advantaged accounts like IRAs or 401(k)s, you can defer taxes and keep more of your money growing. Another approach is to favor tax-efficient investments like ETFs or tax-managed mutual funds,which are designed to generate fewer taxable events, in your non-retirement, “regular” investment accounts. 

This is why we regularly review client portfolios to identify and address these hidden tax inefficiencies. By making thoughtful adjustments, we ensure that investments are not just growing, but doing so as tax efficiently as possible. Managing capital gains distributions isn’t just about avoiding surprises right now, but also optimizing your strategy to support your longer-term goals.

Prepare for the TCJA Expiration

The Tax Cuts and Jobs Act (TCJA) introduced in 2017, brought major changes to the U.S. tax code, including lower tax brackets, a doubled standard deduction, and an expanded Child Tax Credit. However, many of these provisions are set to expire at the end of 2025, potentially resulting in higher taxes for individuals and families.

For investors, this potential expiration represents a critical window of opportunity. Strategies such as accelerating income to take advantage of today’s current lower tax rates, or making larger charitable contributions in the future (when tax rates may be higher), can help mitigate the impact of future changes. It’s also a good time to review all of your available tax deductions, like those for medical expenses or state and local taxes, to maximize the benefits before thresholds potentially shift, or after!

Being mindful of how these changes could affect your tax liability is key to staying on course with your financial goals. With the clock potentially ticking on the TCJA, thoughtful adjustments today can make all the difference in reducing your tax burden and keeping your plan aligned with the future.

Consider Roth IRA Conversions: Lock in Lower Tax Rates Now

Roth IRA conversions are a powerful strategy for managing taxes — both now and in retirement. By converting funds from a traditional IRA to a Roth IRA, you pay taxes on the converted amount today, but your future withdrawals, including earnings, are tax-free. This can be particularly advantageous if you expect tax rates to rise after the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025.

For many investors, partial Roth conversions — spreading the tax impact of a Roth conversion strategy over several years — offer a balanced approach. This strategy allows you to manage the tax impact of any Roth conversions on a year-by-year basis, while taking advantage of today’s lower tax rates. Plus, it gives you more flexibility to structure your retirement income in a way that minimizes your lifetime tax burden.

As with any financial decision, a Roth conversion certainly isn’t one-size-fits-all. To get the best result, you want to work with your tax and financial advisor to weigh factors like your current tax bracket, retirement timeline, and overall personal and financial goals to determine whether this move is the best option for your strategy. 

By planning now, you can use the next few years to lock in tax savings and position yourself for greater financial flexibility in retirement.

Review Your Estate Plan

The Tax Cuts and Jobs Act (TCJA) didn’t just affect income taxes — it also significantly increased the federal estate tax exemption, allowing individuals to transfer up to $13.61 million to heirs, tax-free, in 2024. However, if the TCJA sunsets at the end of 2025 as scheduled, this exemption could be cut in half, exposing more estates to taxes.

For families looking to preserve generational wealth, now is the time to revisit your estate plan. Considering gifting assets to heirs while the exemption is higher can lock in today’s favorable limits. Alternatively, certain types of trusts can be a powerful tool for efficiently transferring wealth while protecting assets from unnecessary taxation.

Even if you don’t expect to exceed the current or reduced estate tax exemption limits, reviewing your estate plan every five or six years helps to ensure that it reflects your financial goals and family’s needs is an excellent idea. 

Proper estate planning isn’t just about minimizing taxes; it’s about creating a lasting financial legacy that provides economic security for the next generation. Taking action now can help you make the most of the opportunities available to you before they potentially change.

Utilize Tax Loss Harvesting

Tax-loss harvesting is a popular and particularly effective strategy for managing your tax liability and optimizing your portfolio. 

By selling investments that have declined in value, you can use the losses to offset taxable gains from other investments. If your total realized losses exceed your total realized gains, you can even offset up to $3,000 of ordinary income annually, and also carry forward any additional losses to use in future tax years.

This strategy can be particularly impactful when markets are volatile; however, timing is key. Many investors wait until the end of the year to harvest losses, only to find fewer opportunities or risk violating the wash-sale rule, which prevents you from repurchasing the same or a substantially identical investment within 30 days. A year-round approach to tax-loss harvesting makes sure that you’re capturing opportunities as they arise throughout the year, rather than scrambling to “loss harvest” only in December.

By integrating tax-loss harvesting into your overall financial plan, you can not only reduce your tax burden, but also keep your portfolio aligned with your investment goals. It’s a smart way to turn market challenges into advantages while staying proactive in managing your wealth. 

Optimize Your Asset Location

Not all investments are created equal when it comes to taxes, and the type of account in which you hold them can significantly impact your overall returns. This is where asset location comes into play — a strategy that involves placing investments in accounts that offer the most favorable tax treatment for each asset class. 

By aligning assets with the appropriate account types — taxable, tax-deferred, or tax-exempt — you can increase your after-tax returns, reduce tax liabilities, and support your portfolio’s longer-term financial growth. 

For example, interest income from many bonds is typically taxed at ordinary income rates, while qualified dividends and long-term capital gains benefit from lower tax rates. Strategically positioning investments based on their tax characteristics allows you to optimize portfolio tax efficiency, and minimize the drag of taxes on your overall wealth. 

Strategies for Effective Asset Location

• Tax-Advantaged Accounts: Hold tax-inefficient investments, such as taxable bonds and real estate investment trusts (REITs) in tax-deferred accounts like traditional IRAs or 401(k)s. This approach allows interest and dividends to grow without immediate tax implications.
• Taxable Accounts: Allocate tax-efficient investments, such as index funds and municipal bonds, to taxable accounts. These assets typically generate income that is taxed at lower rates or may be tax-exempt, reducing the overall tax burden.

Asset location can be an effective strategy when used correctly; however, it requires a thorough understanding of your financial profile, tax situation, and investment time horizon. Regular portfolio reviews and adjustments with your tax and financial advisor are essential to ensure that your asset location strategy remains aligned with your financial goals and changing tax laws.

Final Thoughts

As the year winds down and the promise of 2025 comes into view, now is the perfect time to take a proactive approach to your financial future. Taxes are an inevitable part of life and a “necessary evil,” but they don’t have to derail your plans. 

By leveraging strategies like managing capital gains distributions, preparing for the TCJA expiration, considering Roth conversions, reviewing your estate plan, utilizing tax-loss harvesting, and optimizing asset location, you can reduce unnecessary tax burdens and position yourself for success in the year ahead.

The key to effective tax planning is preparation and thoughtful strategy. Small, intentional adjustments today can have a material impact on your longer-term financial health. Whether you’re focused on your portfolio’s tax efficiency, reassessing your retirement goals, or ensuring your legacy is protected for future generations, each move you make today is a step toward building greater stability in your retirement.

If navigating the complexities of these strategies feels overwhelming, remember that our counsel, care, and expertise are always within reach. At Towerpoint Wealth, we work with our clients year-round to optimize their portfolios for both their financial goals and tax considerations.
This holiday season, consider giving yourself the ultimate gift: economic peace of mind and a disciplined plan for the year ahead. If you want to make sure you’re covered for 2025 — and beyond — we encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us.