MyRA: Is It for You?

In his State of the Union address, President Obama announced plans to create a new ‘MyRA’ retirement account aimed at helping millions of Americans to start building a retirement nest egg.

The next day he signed a presidential memo directing the Department of Treasury to create the government-backed retirement accounts.

Apple will forego the snide comments about how to pronounce “MyRA” that some “bloggers” have made,  and instead layout the proposal, as the White House has described it.

But first let’s make one point very clear, MyRA is not intended as replacement, or improvement, in the plans available today, namely 401(k), 403(b), traditional IRA and Roth IRA. Instead the MyRA proposal is aimed at the millions of low- and middle-income Americans who don’t have access to employer-sponsored retirement plans. That includes roughly half of all workers and 75% of part-time workers.

Plan Outline:

  • The accounts will launch in a pilot program later this year and will eventually be available to any worker who gets paid through direct deposit.
  • All workers may invest in the accounts, including those who would like to supplement an existing 401(k) plan, as long as their household income falls below $191,000 a year.
  • The account will function as a Roth IRA, which allows savers to invest after-tax dollars and withdraw the money in retirement tax-free.
  • But unlike traditional Roth IRAs, the accounts will solely invest in government savings bonds. They will also be backed by the U.S. government, meaning that savers can never lose their principal investment.
  • Workers will be able to keep the accounts when they switch jobs or contribute to the same account from multiple part-time jobs. They will also be able to withdraw their contributions at any time without penalty.
  •  Initial investments can be as low as $25 and workers can contribute as little as $5 at a time through automatic payroll deductions. Like a traditional Roth account, savers will be allowed to contribute up to $5,500 a year under current limits.
  • Once a participant’s account balance hits $15,000, or the account has been open for 30 years, they will have to roll it over to a private sector Roth IRA, where the money can continue to grow tax-free. Workers will have the option to switch to a Roth IRA at any time.
  • The White House said the accounts will earn the same rate as the Thrift Savings Plan’s Government Securities Investment Fund that it offers to federal workers. That fund earned around 1.5 % in 2012.

Opinions and Comments:

Not surprisingly, the MyRA proposal spawned a host of comments in the world of financial journalism, both positive and negative. A small sample:

CNN

CNNMoney blogger, Melanie Hicken, heard from a number of readers, two quoted here:

“Why would anyone consider giving a broke and bankrupt government any more of your money? That’s foolish,” said 62-year-old reader Steve Keller.

In previous years, 36-year-old Grand Prairie, Texas resident Angel Malone had both retirement and other savings set aside. But after weathering four months of unemployment last year and taking a significant pay cut, Malone now says she has less than $1,000 in savings.

“Being able to start it with a small contribution (is) very affordable at this point for me,” she said. “These days anything saved is a help over $0.”

Money Watch

Chuck Jaffe, columnist for Market Watch had some reservations: (editor’s note: the MyRA accounts would have the same return as the G Fund)

The G Fund in 2012 — the latest year for which numbers are available — returned 1.47%, and has an annualized average return from 2003 to 2012 of 3.6%. The problem is that inflation in 2012, as measured by the Consumer Price Index, was 2.08%, which means that in real-return terms, G Fund savers lost ground. The value of their account was up, but their purchasing power was diminished.

The myRA program has a $15,000 limit — after amassing that much, savers will have to move their dollars to a Roth IRA — which isn’t exactly allowing anyone to become a modern-day shoebox millionaire through a lifetime of savings. That limit curtails some effectiveness: Reach the $15,000 limit and you must transfer the funds, so your government guarantee of a protected investment is gone. That’s a flaw if the idea is to help people develop protected lifetime savings.

He also offered a view that MyRA accounts might be used as a “rainy day fund” instead of a longer term retirement savings:

The structure encourages savers to use the myRA for their immediate investment benefit rather than for their long-term savings.

The G-Fund payout of 1.47% in 2012 is a far sight better than most savers could have gotten from a bank account at that time. Let’s assume that trend continues; with the myRA having no penalties for withdrawal, it can be used as a better alternative to a savings account for people trying to keep an emergency fund in an account that is government-insured against loss.

That’s not the intention of the program, but Americans have shown a knack for taking advantage of programs for personal benefits, and not necessarily as the framers of those programs intended.

Forbes

Nancy Anderson, a blogger for Forbes, wrote:

The MyRA account makes sense when used as a stepping stone to get workers who normally wouldn’t be saving to put funds away for retirement into the “broader array of financial products available in the marketplace.” The main problem I see is there isn’t a mechanism in place, as far as I can tell, to transition workers to take that next step.

The New York Times:

“While this will not solve the retirement income shortfall that exists in the U.S., it is a step in the right direction,” said Jamie Hopkins, a professor in the retirement income program at the American College. “These new accounts will open up access to tax-advantaged retirement savings vehicles that many people do not currently have access to because of cost-prohibitive barriers.”

As he pointed out, the maximum workers can save, $15,000, is very limited.

“This is relatively small and for most people won’t make a significant impact on their retirement preparedness all by itself,” he said.

“MyRA: Is It For You?”

So back to the original question,  “Is it for you?” Obviously that is a question that each person answers for themselves, but a few observations can be made:

MyRA accounts, at $15,000, are not going to be “the answer”. They are not a replacement for the established retirement savings plans.

They could be, however, a program that provides a starting point for a retirement strategy that grows and expands to investment options with higher returns. Think young people with low incomes, and not much focus on retirement. A MyRA, with an initial investment of $25 and periodic contributions as low as $5 is a plan that most anyone with a job could follow. And it just isn’t young people that need the stepping stone, as the quote from a 36 year woman above illustrated.

The key will be the discipline to continue a regular savings pattern and an expanded investment strategy that balances return with acceptable risk.

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