News Column

Does 'MyRA' Retirement Account Measure Up?

January 30, 2014

Gail MarksJarvis, Chicago Tribune

President Obama's 'MyRA' accounts could help even the poor save for retirement (file photo)

Jan. 30--The new "myRA" retirement savings accounts President Barack Obama announced in his State of the Union speech Tuesday night are aimed at averting a retirement savings crisis in this country for millions of Americans who have no way at work to save for retirement.

Although half of working Americans have 401(k)s or other retirement savings plans at their workplace, half don't. And while those with no workplace plan could go to a mutual fund company or broker and open an individual retirement account or Roth IRA on their own, most don't. And those with IRAs tend to save far less in them than they will need for their future.

Given the lack of saving and the botched investing that is endemic, about 53 percent of Americans are in danger of falling short of the money they will need for living expenses in retirement, according to research by the Center for Retirement Research at Boston College.

Academic studies show that this disaster is unnecessary. Typically, most Americans could scrape together more savings than they do, but they get busy or distracted by life, and the retirement saving promises they've made to themselves never get fulfilled. In other words, procrastination is the major deterrent to saving for most people, rather than being unable to come up with a few bucks to stash away.

Government officials and think tanks have been agonizing for years over how to keep millions of Americans from needlessly becoming a multibillion-dollar burden on society during their retirement years. And a popular notion has been to make it easier for people to save money in their workplaces for retirement. The idea is that if it's easy to immediately route money from each paycheck into savings, the deed will get done.

Yet making that happen hasn't been easy. For years, bills have surfaced on Capitol Hill to create what are called "automatic IRAs," or simpler plans than 401(k)s that smaller companies could offer employees. But small businesses have balked, worried about administrative costs and legal requirements. Businesses have also been reluctant to provide retirement plans for part-time workers who change jobs often.

Now the myRA is being introduced as a solution. Businesses apparently would have no responsibilities; the government would handle all of it.

Employees would be able to save small amounts, so people with perhaps $25 or even $5 to spare could route it into the plan. People wouldn't get a tax break for making a contribution to the plan, but once money is in it, there will be no tax on the gains. That means the money could grow faster than it would in a savings account, which does face taxes.

A couple earning up to $191,000 a year could open a myRA account, although the plans have clearly been designed to provide emotional comfort to lower-income workers.

Studies show that lower-income workers want to know they can get their hands on their savings in an emergency, and the myRA would allow people to withdraw their contributions at any time -- just like a Roth IRA. Only the gains on the investments would have to stay invested until retirement.

Also, lower-income workers worry about losing money on investments. And there would be no way to lose money in a myRA, because there would be just one investment -- basically a government savings bond that would pay low interest but be backed entirely by the U.S. government.

While Obama's speech drew a distinction between those without a 401(k) and the fortunate people who have enjoyed the tremendous gains of the stock market, the myRA doesn't equalize opportunity with investing.

Last year, the stock market gained 30 percent, and historically it has averaged 10 percent annual gains. But those investing in a myRA in 2012 would have earned just 1.5 percent in interest.

Under the administration's plan, a person will be able to move money out of the myRA and into regular stock and bond funds in a Roth IRA once the total in the account is $15,000 or after 30 years, whichever occurs first.

But consider what could happen in 30 years if a person earned 3 percent per year, on average, and invested $1,000 a year. The person would have about $49,000 for retirement in the myRA, or about $1,960 to live on a year, plus Social Security.

By comparison, a person who placed the same amount in a 401(k) that invested in a balanced fund of stocks and bonds averaging 8 percent a year would come out considerably ahead. That person could end up with $122,000, or about $4,880 a year for retirement living expenses.

Twitter @gailmarksjarvis


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