Submitted by Lance Roberts of STA Wealth Management,
During this week's State of the Union address the President stated:
"Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in.."
While there are few details available about the actual structure and makeup of MyRA, here are the details we know so far.
- MyRa's would be structured like a Roth individual retirement account. Similar to savings bonds, the investments would be backed by the federal government.
- Because the investments would be structured like savings bonds, there would be principal protection, meaning the account balance couldn't go down.
- There would be an initial pilot program for companies to sign up to offer the accounts to their employees, and firms have until the end of 2014 to participate in the initial phase.
- Workers would be allowed to invest if they make less than $191,000 a year.
- There would be NO tax penalty if the investments are withdrawn.
- Initial investments could be as low as $25 with subsequent investments as low as $5. These investments could be automatically deducted from an individual's paycheck.
- Once an individual accumulates $15,000, or they have the same account for 30 years, it would have to be rolled over into a traditional IRA.
Here are my initial thoughts.
1) While the President said that these "MyRA Savings Bonds" would offer a "decent" rate of return, he did not disclose how these investments would be structured. However, if we assume that these accounts will offer the same variable interest-rate return as the Thrift Savings Plan Government Securities Investment Fund, that rate of return was 1.47% in 2012 while the rate of inflation, based on CPI, ticked up 2.08%. With interest rates now bottoming, and many expect a continued rise in the future, that rate of return may continue to be less than the rate of inflation for the foreseeable future.
2) As I have discussed in the past, the large majority of American's live paycheck to paycheck. American's do not lack for a vehicle to invest savings in for retirement (Roth IRA's, IRA's, 401k's, SEP's, etc.) but lack the ability to save.
3) The problem that needs to be addressed is from the economic front. With 92.8 million individuals excluded from the work force, 1 in 3 American's on some sort of Government assistance, stagnant wage growth over the last 5 years and 1 in 5 on food stamps, the issue is about employment rather than saving. Solve the employment problem in America and the retirement savings dilemma will begin to resolve itself.
4) There is no real incentive for anyone to actually use the "MyRA" as it has a limit of $15,000 for retirement but rather a high-yield, government guaranteed, savings account. Since there is no penalty to withdraw money from the MyRa at any time there is also no incentive to use it to actually save for retirement. However, if we assume that the rate of return is equivalent to Thrift Savings Plan of 1.47% that is significantly higher than what banks currently pay. The incentive will be to use the MyRA to save for future consumption rather than future retirement.
5) Investors have a VERY poor track record of investing in the financial markets and typically fall prey to the emotional mistake of "buying high and selling low." Given that the MyRA has to be transferred to an IRA after reaching $15,000, the guarantee of a "protected investment with a decent return" is gone. Furthermore, there is a disincentive to reach the $15,000 level as it will change the account from a NO PENALTY withdrawal to one with a 10% withdrawal penalty prior to the age of 59 1/2.
6) Lastly, the limit of $15,000 on the MyRA is rather pointless. If the goal is to help people fund their future retirement, the limit is rather ridiculous. Today, if you assume that a portfolio of bonds could deliver an annualized living income of 4%, a retired couple could look forward to living a middle income lifestyle once you factor in social security income. However, such an asset level only exists at the top 10% of the population leaving a large swath of individuals undersaved and underprepared for retirement. A $15,000 MyRA account is going to do very little to change the dynamic of the lower 90%.
It seemed to me that the entire point of the MyRA was really more of about getting "votes" than actually helping middle class American's substantially change their retirement futures. While the entire State of the Union address was littered with "bodies of past ideas" there was little new about changing the direction of the economy, increasing employment opportunities for the younger generation or resolving the issues of spiraling health care costs.
While Obama did make it clear roughly 11 times during the speech that "he has a pen and a phone" to resolve issues on his own - maybe it is time to start working with Congress through the Constitutional process to deliver real ideas, real reform and a better future for middle income Americans. But then again, that is likely to be considered radical thinking.
Hopefully, this time, "if you like your current retirement plan" you will actually be able to keep it.