Some aspects of the economy get a lot of attention. You get a daily earful from the financial press about some random wiggle in the stock market. News organizations devote endless columns to the musings of the Federal Reserve.
Then there are other economic problems that you don’t hear nearly enough about. One which we think should be much more prominent is the fact that too many people are financially unprepared for retirement and to weather hard times before then. Almost a third (31 percent) of non-retirees have no pension or retirement savings whatsoever. The average family nearing retirement only has $12,000 in retirement savings. According to some estimates, more than half of households will be forced to significantly cut back on their spending in retirement; and that’s up 10 percentage points over the past decade. At the same time, more than 75% of households do not have enough of a financial cushion to replace three months of income, the amount that many financial planners recommend.
Sometimes people can’t save enough because they don’t earn enough. But just as often, they just don’t have access to a savings plan that’s easy to start, not too risky, inexpensive, and doesn’t penalize you if you need to withdraw something in an emergency.
Well, they do now.
Yesterday the Treasury Department launched a new savings vehicle, myRA, a no fee, risk-free savings account that provides a better risk-adjusted return than anything comparable you can get on the private market. What’s more, there’s no minimum contribution and you can withdraw your contributions anytime without paying the normal tax penalty.
Here’s how it works:
Anyone earning less than $131,000 ($193,000 for a couple) can contribute to myRA. The best way to steadily build a nest egg is to put your savings on autopilot. You can do this by setting up an automatic deposit from your paycheck or bank account to myRA online. Or you can contribute on a one-time basis, including by directing some of your tax refund to your myRA account.
The account is taxed as a Roth IRA, meaning that you put in after-tax money but then don’t ever owe tax on the earnings that build up over the years. As we noted, you can withdraw your contributions (but not your earnings) for any reason without triggering a tax on your earnings or the 10 percent penalty that would otherwise apply. If your income is under $30,000 ($60,000 for a couple), you may also be able to claim a Saver’s credit of up to 50 percent of your contributions.
As with other Roth IRAs, you can save up to $5,500 per year in myRA ($6,500 if you are over age 50). You can rollover your account to another Roth IRA or Roth employer plan any time. Once your account reaches $15,000, Treasury will automatically roll it out into a private sector Roth IRA.
myRA has numerous advantages over private accounts. Most private savings vehicles have a required minimum, but with myRA, you can save $5 a month if you want, which makes it a great starter savings vehicle. Unlike myRA, private plans have fees, and one of the best predictors of your return on your savings is how much you’re paying in fees. Finally, it is risk-free and offers quite a high risk-free rate of return. The money in myRA accounts is invested in a Treasury bonds fund which paid an average annual return of 3.19% over the past decade, a better return than if you invest directly in Treasury bonds.
Risk-free investments aren’t for everyone. If you’re saving for retirement, most financial advisors will recommend that you invest in a balanced fund that gradually shifts from more stocks to more bonds as your near retirement. On the other hand, if you are also saving for a rainy day fund, you probably want to invest a basic amount of your savings in a low-risk product so you won’t lose money if you need to withdraw when the market is down.
This makes myRA a great investment for people starting to save for both objectives. Your first $15,000 is invested in a risk-free product. Then, once you have a solid financial cushion, it is rolled into another investment that is presumably more appropriate for savings that you don’t need to access in the short-term, including savings for retirement (Treasury hasn’t decided what the default fund will be yet but we would urge them to go for a low-fee, lifecycle indexed fund).
While it’s got many great attributes, we’re the first to admit that myRA cannot be the only answer to the retirement security crises and the financial shocks that too many families face. Expanding access to employer-sponsored retirement plans, like 401(k)s, is critical. One-third of workers do not have access to such a plan, and the fraction is much higher for workers who are low-income (59 percent), part-time (63 percent), or work for a small business (49 percent). Such employer-sponsored plans are more effective at boosting retirement savings than IRAs because they make savings easy and automatic, and especially because they often come with an employer contribution or match.
We also must protect and strengthen the most important, vested, guaranteed pension out there: Social Security, especially given that some misguided politicians are supporting broad cuts to this essential component of retirement security.
But for the millions of workers who lack emergency savings and access to a retirement plan, myRA is a great start and a welcome response to a serious economic problem that, if we have our way, you’ll start hearing a lot more about.
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