In his State of the Union message, President Obama announced a new retirement savings plan called MyRA. The first rule in marketing is a name easy to pronounce. Confusion reins. It is not MyIRA, or Myra, a girl’s name. It’s My-are-a, I think.
MyRA is for those with less than $191,000 in household income, or $129,000 in individual earnings, who do not have a retirement plan offered at work. They will be able to open an account with as little as $25 and contribute a minimum of $5 in payroll deductions. It will work like a Roth IRA, funded with after-tax dollars and growing tax-free to a maximum of $15,000. Account holders may roll their account to a conventional Roth IRA at any point.
For an administration known for whimsical monikers like the Affordable Care Act, we might have expected a more catchy name like the Government Retirement Investment Plan or GRIP for short, along with a snappy slogan: No 401(K)? Get a GRIP! How cool is that?
Since the announcement of MyRA there has been both applause and carping, one source calling it a “spare change IRA.” In my view, any effort to spur retirement savings is a plus. Data shows that too many people approaching retirement age have saved too little, if anything at all. But there are well-established more robust ways to save for retirement. For each $1,000 per month a person wants in retirement income outside of Social Security, a savings pool of $300,000 is required. This figure is based on not spending more than 4% of principal annually.
A problem with MyRA is lack of investment flexibility. The Treasury Department will create the only investment option, a bond fund similar to the G Fund offered federal workers in their Thrift Plan. The G Fund returned 1.89% in 2013.
A worker who starts with $25 and contributes $5 twice a month for a year will have deposited $145 the first year, adding $120 in subsequent years. Sure, that’s the minimum, and it’s a start. But at 2% to 3% earnings, the nest egg will grow slowly, barely keeping up with inflation, if that. The G Fund has had an annual return of a little over 2.5% for the last five years.
Contrast that with a well-regarded global mutual fund that has delivered 13.21% for the last five years, and 11.49% since inception in mid-2000, a record that spans two of the worst bear market dips that we have seen in some time. No, an equity mutual fund is not guaranteed as MyRA will be. Values fluctuate and past returns cannot be used to project future performance. Plus mutual funds have minimums to start, say, $1500 to $2500, and minimum additions, plus internal fees, because small accounts (like MyRA) are expensive to administer. No one has said how the expenses of MyRA or the cost to employers to administer small payroll deduction accounts will be handled.
The goal of any retirement savings account is to grow future purchasing power. For younger savers, we like Roth IRAs. You contribute after-tax money so you give up a tax-deduction, like MyRA. But the money grows tax-free and is not taxed when withdrawn in your retirement years. Trailing one-year “all items” inflation through December 2013 was 1.5%. To grow money with a 3% annualized real return over and above current inflation implies a return of 4.5%. You are not likely to see that in government bonds anytime soon. U.S Savings Bonds, I-Bonds issued between November 1, 2013 and April 30, 2014, are paying 1.38%.
Using the 4% theory, if you want $50,000 in annual retirement cash flow from your investment portfolio, you need $1,250,000 in capital. Whether you invest in a traditional IRA, Roth IRA, 401(K) or other work-related plan, you need to save early and often. Understand “dollar-cost-averaging” as a device to capitalize on stock market dips.
Think about it, guys. If you had a girlfriend named Myra, do you think that a $25 date to start, with $5 for subsequent outings, would get you very far? Get a grip!
Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ firstname.lastname@example.org