In last week’s State of the Union address, our president said, “Let’s do more to help Americans save for retirement. Today most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k)s. That’s why tomorrow I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg.”
He further explained that the “MyRA guarantees a decent return with no risk of losing what you put in.” Sometimes — well, much of the time — when an investment touts that you aren’t going to lose money, it also means you aren’t going to make much either.
The good news is that President Barack Obama is creating an investment vehicle which will hopefully encourage many Americans to save for retirement. With around half of all Americans having no employer-sponsored retirement plan and more than half of all American workers having less than $25,000 in savings and almost a third of workers having less than $1,000 in savings (outside of their home and pensions), it is critical that we encourage saving for retirement.
The way a MyRA (comment: can we please change the name?) works is employees can have part of their pay deducted for deposit into an account invested in U.S. government bonds. For tax purposes, it would be treated the same as a Roth IRA (tax-free earnings but not tax-deductible contributions).
It will be available to people with annual household income up to $191,000 whose employers choose to participate. The account is affordable. The initial investment will be $25 and payroll contributions can be as low as $5.
These accounts are intended to be “starter” retirement savings accounts. The maximum balance can be $15,000. After reaching that level, the money would have to be rolled over into a Roth IRA.
Getting back to my original question, a MyRA is a surefire route for beginning savers to fairly painlessly start planning for retirement but it is by no means a way to even begin to see potentially fabulous returns.
The return will be tied to U.S. Treasury bond rates which have not been particularly impressive over the past few years. Lately, bond rates have not kept pace with inflation and as such, they are almost like moving backwards. However, if you go back 25 years and look at Treasury rates, the return has been much more impressive and has been nearly three times better than the rate of inflation.
If you are just getting started with investing, you may be quite early in your working years. Having a retirement saving vehicle that has no administrative fees (another plus for the MyRA) and allows for automatic deductions from your paycheck, a little each week, will hopefully provide enough positives to get more Americans to saving for retirement.
When people begin saving for retirement, seeing their money grow, even if it’s a very modest growth rate, is an important motivating factor to encourage continued investing.
A research paper done in 2012 by an MIT professor found that 46 percent of American senior citizens have less than $10,000 in financial assets when they die. For most, Social Security is their only means of financial support. Clearly, we need to do more as a nation to help Americans save.
While this retirement account is just a start and we need to do more to make it possible for Americans to feel financially secure enough to save, it is a move in the right direction.
Karen Paul is a financial services consultant in Burlington.
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