Dear Mr. Market:
If you ask the average hard working American what their top financial concerns is, it’s that that they won’t be able to retire. We could certainly go on and on about different solutions and how people can get on track to make their dreams a reality but today we will focus on a new program offered from the government. On January 29th President Obama delivered his State of the Union address. One of the takeaways from this speech was a new retirement account called MyRA (short for My Retirement Account).
Currently over half of the U.S. workforce is not covered by a retirement plan through their employer. MyRA is targeted at low to middle-income workers, encouraging them to save for their own retirement. Contributions will be funded through automatic payroll deductions where individuals can start with as little as $25 and contribute amounts as small as $5. Individuals would be guaranteed that their account would never go down and they will not pay any fees on the accounts. Sounds like a great product doesn’t it?! Well let’s take a step back and dig a bit deeper to really explore what the MyRA is all about….
The MyRA can essentially be viewed as a way to introduce individuals that have not saved or funded a retirement account to the many long-term benefits of doing so. At this point companies are not required to be involved in the program, if President Obama wants to force employers to participate a vote from Congress would be required. The accounts would be funded with after tax dollars much like a Roth IRA. While it will be funded with payroll deductions individuals will be able to keep their accounts when they change jobs. MyRA is subject to Roth IRA income and contributions limits. Individuals can invest up to $5.500 per year (or $6,500 for investors 50 or older); once the owner reaches the age of 59 ½ they can make withdrawals tax-free. There are also no required minimum distributions (R.M.D.’s).
Ideally the MyRA was created to be a ‘starter account’ for individuals that have little to no saving or investing experience. When the balance of the account reaches $15,000 or after 30 years, individuals must roll it over into a regular Roth IRA. This can be done with a brokerage firm or other financial services company. Many analysts feel that individuals will be attracted to the low minimums and more importantly the guarantees associated with the MyRA. Far too often the stock market is looked at as a roll of the dice or a game fixed for the mega-wealthy. These often become barriers to the novice investor, keeping them from investing.
Within the MyRA there is only one investment choice. The money will earn interest at the same rate as the Government Securities Investment Fund that is offered in the federal employees savings plan. It is commonly referred to as the ‘G Fund’ and over the last 5 five years has earned between 1.45% and 2.97%. In 2012, the latest year for which numbers were posted, the ‘G Fund’ returned 1.47%. While this is certainly more than what savings accounts or money markets are paying, will it really get Americans to the point where their retirement dreams start to become reality? In 2012, inflation, according to C.P.I. (Consumer Price Index), was 2.08%; which essentially means that G Fund investors where losing money. While their account grew throughout the year the purchasing power of their dollars was negatively impacted. If the MyRA wants to encourage investors to save it will need to post more competitive rates especially when many economists expect inflation to increase.
Currently there are many options for investors to save towards their retirement or other goals. The bigger issue is that approximately 80% of Americans are living paycheck to paycheck. The average employee is more focused on paying their bills and other liabilities and retirement is unfortunately pushed towards the back in order of priorities. Mr. Market and the investment community as a whole have portrayed the investment industry as an elite club. There are better options available to individuals than the MyRA but at least it gets some people started in the right direction.
Too often individuals think they need several thousand dollars to establish a retirement account. If an individual or their spouse has earned income an IRA can be opened. It is also important to note that investors have until April 15, 2014 to make contributions to an IRA for tax year 2013. Several investment firms have low minimums, no expenses, and literally thousands of suitable investment options within IRA’s instead of just one. TD Ameritrade (ATTACH TDA HYPERLINK), for example, has no investment minimums, no annual fees and offers hundreds of low fee mutual funds and commission free exchange traded funds (E.T.F.’s). Investment firms can link a banking account so that automatic contributions can be made to the IRA.
We hope that the MyRA will ultimately make individuals take a moment and think about their retirement and how they are going to make their dreams a reality. For any investor that has questions or feels overwhelmed we would encourage them to ask questions and not fall victim to ‘paralysis by over analysis’! Take the time to talk with a financial professional and explore all your options. We would also suggest that you talk with an RIA (Registered Investment Advisor) as they work within a fiduciary relationship and are required to do what is right for each individual and not what will reward them in their pocketbook. Lastly, if you’re interested in saving for retirement but your company doesn’t offer you a plan talk to us! A lot of employers may want to set one up but are also overwhelmed with what it takes to establish one. We can help your company get a plan started or dramatically improve the one you have!
“The journey of a thousand miles begins with one step.” – Lao Tzu