Thursday, January 30, 2014

Retirement Savings for People Who Can’t Afford to Save: MyRA

Retirement Savings for People Who Can’t Afford to Save: MyRA

Suppose that your employer doesn’t offer retirement benefits. And suppose you don’t have  $1,000 of extra savings to open an IRA.[1]  You are one of those folks President Obama has identified who requires help.  I agree with the President that the working poor face bleak prospects in retirement.  The President has proposed a solution called MyRA.  The program would allow employees to make small contributions of as little $50 via payroll deductions into an account that would be invested in U.S. treasury bonds.    The balance could grow for 30 years or until the investor has a balance of $15,000.  At that point it would be rolled into a traditional IRA.  At present, the returns would be about 1.5% to 2% per year. Contributions wouldn’t be tax deductible, but any gains would eventually be taxed.

The program is entirely voluntary.  Employers don’t have to offer it.  Since the US Treasury will administer the program through a payroll deduction, it won’t cost employers much to participate.  However, this program is aimed at employers who don’t offer much to employees in the first place.

The President’s proposal creates a rosy picture of millions of low-wage workers squirreling away a few dollars until they’ve come up with a nest egg that’s big enough to become a full-fledged IRA.  Strangely, married couples with incomes up to $191,000 are eligible to participate.

MyRA is an idea that’s rather detached from reality.  The folks working in jobs without any retirement benefits are living paycheck to paycheck.  By the time the groceries, rent, and other expenses are paid, there’s no money left over.  Many of these people are already trying to figure out how’ll they manage to pay the subsidized premiums for health insurance under the Affordable Care Act.  While they face a daunting retirement challenge, retirement isn’t on their top ten list of financial problems.

MyRA may serve one useful purpose.  Workers can withdraw funds from a MyRa without penalty (although the gains would then be taxed), so the account might serve as a  small rainy day fund when the car breaks down or the kids need new shoes.  Unless there’s some kind of fundamental improvement in wages, the only one who might feel better about retirement security among the working poor will be the President.

[1] The minimum initial contribution is $1,000 at Schwab and Vanguard and $2,000 at Fidelity.

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