If you've heard of President Obama's plan to encourage more Americans to save for retirement, you may be wondering if you should hop on board and open one of the new government-sponsored myRA accounts.
You've got plenty of time to decide. myRAs won't be available until the end of this year, and then only if your employer has joined a pilot program. More details are coming. Still, you can know now if a myRA will be right for you.
Am I eligible?
myRAs (sort of like "my IRA") are intended as starter investment accounts. Think of them as an IRA with training wheels. They're aimed at the nearly half of American workers who have saved less than $10,000 for retirement. They'll be rolled out at the end of this year – so far just for workers whose employers sign up to be part of a pilot program.
At this point, there's just one eligibility rule: You must earn under $129,000 a year ($191,000 for couples). But that doesn't mean a myRA is a good plan for everyone who qualifies.
Do I want one?
These accounts make sense only for a certain segment of savers. You might be one if:
- Your employer doesn’t offer a 401(k) retirement plan.
- You know you ought to save and invest, but you're unsure where to start.
- Fear of losing money stops you from learning how to save and invest.
There's reason to worry about the low rates of retirement savings in the U.S. Nearly half of workers have set aside no more than $10,000, according to the nonprofit Employee Benefit Research Institute. The implications: Many are facing the likelihood of a retirement in poverty.
myRAs are meant to inspire younger workers and non-savers to get going. They're designed to be:
- Safe: The principal balance is guaranteed not to drop; the money is held in government savings bonds.
- Tax-free in retirement: You contribute earnings after taxes and withdraw it tax-free after age 59 1/2, as if it’s a government-protected version of a Roth 401(k).
- Easy: Sign-up will be online with contributions deducted automatically from your paycheck. All you'll need is a direct-deposit option, available to about three quarters of American employees, especially those in large companies, according to research by NACHA, a trade group of electronic payments vendors.
- Cheap: No fees are charged. You can open a myRA with as little as $25.
- Flexible: You can contribute as little as $5 per paycheck -- up to $15,000 in total. If you work two or three jobs at once, you can make contributions from all of them.
- Portable: A myRA goes with you if you change jobs.
- Better than savings accounts. The return on savings accounts is typically under 1%. myRAs will do a bit better.
Personal savings matter more than ever as employers continue dropping the defined-benefit pensions that once guaranteed a dependable stream of income for many American retirees. Between the early 1990s and 2011, the proportion of private industry workers covered by these annuity type pensions shrank from 35% to 18%, according to the Bureau of Labor Statistics. This loss puts the responsibility for saving on individual workers.
If your retirement is underfunded, will a myRA close the gap? No. The most you can save in a myRA is $15,000 – not nearly enough to fund a retirement. For this reason and others, myRAs have critics. They point to:
- Small returns: myRA returns will be equivalent to what federal employees earn from the Thrift Savings Plan Government Securities Investment Fund – not much. After expenses, plan accounts in 2013 earned 1.89% -- slightly more than the 1.5% rate of inflation. If inflation grows faster than your returns, your savings lose buying power.
- No education: You can roll your myRA into a private-sector retirement account anytime you wish. You must roll over the account into a Roth IRA once it's 30 years old or reaches $15,000. Critics want an education component, to move new savers from training wheels to competent investing in the range of options available for building retirement funds.
- Early withdrawals. You can withdraw savings early with no penalty. That could undermine the goal of increased retirement savings.
- Limited options: myRAs offer no options for earning stronger returns by investing in a diversified portfolio of mutual funds containing stocks and bonds.
- No auto-enrollment: Research shows that more people save for retirement when they're automatically in 401(k) plans where their employers offer them. With a myRA, you'll have enroll yourself. Employers may let you know when it's time to do that, but they don't have to. (Employers won't administer myRAs or contribute to them.)
Don't stop there
Some experts estimate that by 55, we should have saved around seven times our annual salaries. If you make $50,000 a year, that's $350,000. Planners may use divergent assumptions about future expenses and inflation, though. Others advise saving 12 times your salary or more. (Run your own numbers through different calculators -- AARP's Retirement Calculator and Vanguard's Retirement Income Calculator, for instance.)
Washington Post columnist Michelle Singletary worries myRAs will lull participants into thinking "that saving $5, $10 or even $20 every paycheck will be enough even over 30 years. It won’t be."
By all means, open a myRA if it seems helpful. But don’t stop there. Make it a starting point for learning and investing more.