In March, legislators passed the CARES Act, a massive stimulus package designed to help American households pay their bills through the coronavirus-fueled economic crisis. The CARES Act will ultimately cost $2.2 million, an alarming price tag for a federal government that's already overextended. The latest numbers show the federal deficit for this fiscal year, which began on October 1, has already reached a mind-blowing $1.48 trillion.
Funding your own stimulus check
Those federal deficit concerns have some politicians considering alternative funding sources for any future stimulus packages. One idea, dubbed the Eagle Plan, would allow Americans to get a one-time payment of, say, $5,000 as a loan against their future Social Security benefits. The borrowed funds, plus interest, would be repaid from a person's first Social Security checks -- meaning the beneficiary would have to wait a few months after claiming to receive any Social Security payments at all.
The Trump Administration has not commented specifically on the Eagle Plan, though a White House representative has confirmed the president's commitment to protecting Social Security benefits. Whether you'll have the option to borrow against your future Social Security remains to be seen. But this type of program would rob the one source of retirement income that's keeping millions of Americans afloat. And that's a dangerous precedent to set.
Social Security keeps Americans out of poverty
The conventional approach to building wealth for retirement involves saving and investing over long periods. Accumulate savings equal to 20 or 25 times your annual income and you should remain solvent for the rest of your days. But most Americans fall well short of that mark. According to a 2018 report from Northwestern Mutual, only 66% of Americans have more than $5,000 saved for retirement.
Those with no nest egg are wholly dependent on Social Security to survive. Granted, living solely off Social Security is no picnic -- the benefits support a lifestyle that's just a notch above poverty. But that notch is meaningful; Social Security keeps more people out of poverty than any other program. That's why any effort to cut, reduce, or delay those benefits could be disastrous for a future generation of seniors.
Other ways to raise cash
Of course, if you've lost your job and the bills are piling up, the status of your retirement funding is not your immediate concern. You're more worried about paying rent and buying food. In that mindset, you might jump on the opportunity to borrow from your Social Security if you could.
Alternatively, there are other ways to tap into your retirement funding if you're in a tight spot.
- 401(k) or Traditional IRA Early Withdrawal: Normally you'd pay income taxes plus a 10% penalty on 401(k) and traditional IRA withdrawals taken before the age of 59 and a half. In 2020 only, that penalty is waived on withdrawals up to $100,000 -- if the coronavirus pandemic has affected you financially. That could mean you lost your job or you have to stay home and care for your kids or a spouse who's contracted COVID-19. You'll still owe income tax on the withdrawal, but you can pay over the next three years. Or, if you can repay the withdrawal within three years, you won't owe any taxes at all.
- Roth IRA Withdrawal: You can withdraw your contributions from a Roth IRA at any time without taxes or penalties. Be careful here, though. You will get taxed if you withdraw more than you've contributed. At that point, you're reaching into the earnings -- and those are off-limits until you've had the account open for at least five years and are at least 59 1/2 years old.
- 401(k) Loan: 401(k) loans are less appealing than withdrawals in the current environment. The biggest problem is that you can't borrow from your retirement account if you're no longer employed by the plan sponsor. And if you do take out the loan and then lose your job, you have to repay those funds before the next Tax Day to avoid taxes and penalties.
Retirement funds should be the last option
Keep in mind that you should pursue these options only if you have no other choice. As awful as it is to borrow from family, even that's a better route than pulling money out of your retirement account. Here's why. When you drain your retirement account, you're giving up all the future earnings on whatever amount you withdraw. Depending on your age, that could be a significant amount of money.
Consider this. A $5,000 balance that's earning 7% on average basically doubles in value every 10 years. So if your retirement is 20 years away, a $5,000 withdrawal today ultimately sets you back about $20,000.
If you must tap into your retirement accounts, find a way to increase your contributions substantially as soon as you're back on your feet. You still have Social Security -- for now, anyway -- but you'll also need those savings to protect your lifestyle in your senior years.