Retirees and financial planners' ears may have perked up a little when they heard President Obama mention a new kind of "savings bond," curiously called the "myRA."
The myRA is new type of retirement savings account geared toward new savers, low and middle-income earners, and people who aren't offered a retirement savings option through their employers. So, is this a good thing or a bad thing? I have mixed feelings about this new offering, and some of the specifics surrounding it. Although it's good to get people accustomed to saving for retirement sooner rather than later, I'm not sure this is the right tool for the job.
The myRA will be available to individuals earning up to $129,000 per year and couples earning up to $191,000 per year. This new account combines some benefits of a traditional savings bond and a Roth individual retirement account into a unique little savings vehicle. The account principle would be guaranteed by the government, so the account balance would never go down, much like a government savings bond. The Roth component of the myRA is that all contributions are considered made with after-tax dollars, meaning that growth and withdrawals are not subject to taxation. This new retirement account also shares the same contribution maximums as a Roth IRA, with a cap of $5,500 per year.
Another attractive feature of the myRA account is that you can open one with as little as $25 dollars and subsequent contributions will be made via payroll deductions, which can be as low as $5. There are no management fees associated with the account that could erode accumulated savings, and the account can be transferred between jobs. However, when your myRA balance reaches $15,000, you'll have to roll it over into a privately managed IRA, which will then be subject to rules and guidelines specific to those accounts.
The idea here is that the myRA gives people the incentive (cheap to set up and no fees), a sense of security (principle protection) and a straightforward way to begin putting away money for retirement (the government will manage the paperwork and investments). The $15,000 account maximum helps define the myRA as a "starter" retirement account that can serve as a launch pad, and can encourage people to save for retirement. It's important to note that the myRA is not meant to be an individual's permanent retirement account (as the account has a maximum life of 30 years) and will not take of the place of diligent financial planning for retirement.
When it comes to investing, with a myRA account, your money will be invested in the Government Securities Investment Fund. The GSIF is currently available to federal workers enrolled in the Thrift Savings Plan, and has an average annual return 2.24 percent over the past three years according to the funds website, TSP.gov.
Don't expect soaring returns with this account, as it's not intended for rapid growth and performance, but more for principal protection.
This low rate of return is one of the largest problems that I have with this account. A 2.24 percent return is barely enough to keep pace with inflation today, when the Federal Reserve is intentionally trying to keep the inflation rate low. As of December, the three-year average annual inflation rate for consumer prices was 2.06 percent, and you can expect for that number to increase in the coming year. Although I agree that this is better than what you would get from a high-yield savings account (another asset that I'm not overly fond of), I would argue that any account focused on retirement must concentrate on growing money and outpacing inflation.
The myRA is still a long way from fruition. Companies are eligible to sign up for a pilot program until the end of 2014, and any meaningful adaptation wouldn't occur until 2015 or beyond. The success of this new retirement account largely hinges on two major factors, which are getting employers to embrace it, and then convincing employees to opt in. The Treasury Department hasn't provided specifics on what the employer requirements would be, which makes it hard to speculate on the success or failure of this initiative, but I suspect it's going to be an uphill battle.
You could also question the necessity of the myRA, since there are investments already in play that do what the myRA is slated to do. Two, which quickly come to mind, are Social Security and Treasury bonds. Social Security is government-sponsored, has automatic payroll deduction, and low minimums and Treasury bonds are already guaranteed by the government and allow you get your money back when the bond matures.
At worst, I would call it an inexpensive government savings account. A saver can withdraw their contributions at any time without penalty. However, if a withdrawal is made before 59½, that person will have to pay tax on the interest accrued in the account, much like a Roth IRA. Without serious teeth, the incentive not to touch money designated for retirement is left entirely up to the individual. Given the demands and difficulty placed on low and middle-income earners, I would argue that the delayed gratification of diligent savings won't be enough to keep people invested in the program. I would say that flexibility, allowing both ease of access to the account in an emergency scenario can be balanced with provisions that discourage frivolity.
At best, I would consider this a worthy effort to raise the awareness of younger and lower-income workers of the importance of retirement savings, by actually offering a simple and easy way to begin to save. The $15,000 account maximum could promote reasonable goal setting, by offering a practical savings target, and then having the ability to roll over that sum into a private IRA.
Is this something that could radically change the way people approach retirement? No. But I think we can all recognize that many people, despite their best intentions, are not financially prepared to retire, and maybe by staying aware and following the progress of the myRa, people will be able to start saving earlier, and enjoy a successful and comfortable retirement.
Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment advisor in Alexandria, Va. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.
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