Ever since President Barack Obama announced in January his new myRA for expanding access to retirement savings accounts to the masses, debaters pro and con have surfaced in traditional news media and via the web.
Good idea? Bad idea? It all depends on the perspective of the individual providing the assessment. Full details of the plan remain to be defined, so opinions are based solely on what is currently known or interpreted about myRA.
“In general, I am for anything that encourages people to save,” said Will Hepburn, president of Hepburn Capital Management. “That is a big plus for [President Obama’s] proposal.”
The savings account itself – short for “My Retirement Account” and pronounced “My-R-A” – will be government-run and permit those eligible to open an account with only $25 and contribute as little as $5 per paycheck toward their financial security.
Those enrolled in myRA will be able to save for 30 years or until the account accumulates $15,000, at which time it can be moved to a Roth IRA. In any given year, the account holder will be able to contribute up to $5,500 to myRA. Savers will be allowed to keep their accounts when they change jobs to any employer offering the option.
Similar to the popular Roth IRA, the myRA account will be set up using after-tax contributions. Savers will be subject to the same income limitations as with a Roth IRA, currently a top annual income of $129,000 for individuals and $191,000 for couples. Contributions can be withdrawn tax-free at any time, but earnings taken before the account holder reaches age 59 ½ will be taxed.
Earnings will accrue at the same interest rate as the G Fund of the Thrift Savings Plan (TSP) Government Securities Investment Fund available to federal employees. This G Fund rate is based on the weighted average of all outstanding treasury notes and bonds with four or more years to maturity. As a result, participants who invest in the G Fund earn a generally higher long-term rate on what is essentially a lower-rate, short-term security, according to www.tsp.gov.
The TSP site quotes calendar year G Fund returns of 1.89 percent in 2013, 1.47 percent in 2012 and 2.45 percent in 2011. The riskier S&P 500 TR USD (Price) returns for the same years were 32.39, 16.00 and 2.11, per www.morningstar.com. The myRA contributions will be invested only in U.S. debt and guaranteed against loss.
For anyone not familiar with the financial markets – and that could be a significant portion of the 44 percent of American workers estimated to be employed by firms not offering retirement plans – the greater the risk, the higher the rate of return. The objective is to put money in the best mix of investments – stocks, bonds and other types – to meet goals, years to retirement and tolerance for risk. That takes knowledge, time, dedication and relentless research to achieve.
Nancy Jauregui, owner of Grand Canyon Financial, identifies the barrier to Americans saving money for retirement more as a need for education and perseverance than the creation of new investment vehicles and government involvement.
“We need financial education in the schools,” Jauregui explained. “That’s the problem. We should be teaching young people what they should be doing financially when they get out of school. It’s more about education than another [savings] option to participate in.”
Jauregui also emphasizes personal responsibility in planning financially for life and retirement.
“People need to look at their budget and their personal economy,” she advised. “Don’t look to Washington and Wall Street to fix it. People have to do this on their own. It takes a level of education, but grit, too.”
Account owners will pay no fees and employers will offer the plan as another payroll deduction option, with the federal government managing the program. Under this scenario, employers should have little responsibility other than providing the option to their employees, if ownership chooses to participate.
The U.S. Treasury reportedly is looking at a mix of small, medium and large companies for a pilot program to be introduced by year-end. This begs the question: what, if anything, can be done locally to encourage people to begin saving or accumulate more for retirement?
“People don’t have as much money, but they are not getting into debt like they were 10 years ago,” Hepburn said. “And that is a step towards savings and financial growth. It’s already happening.”
An individual today can open an IRA account with a company such as Oppenheimer or Putnam, and build it with deposits of only $25, Jauregui said. These and other vehicles already are in place to help people save for retirement, if they know where to look and how to participate. Those without this knowledge have the option of working with a financial advisor, such as Hepburn, Jauregui or others who have set up shop in the area.
Advantages touted by proponents of myRA include freedom from sales commissions and account management fees, plus a smaller sum to initially open accounts. Jauregui acknowledges public confusion, concern and hesitancy to seek investment advice.
Call one or more financial advisors and ask how they are paid, Jauregui recommends, noting that they should be comfortable explaining this to clients. Find out how often they would meet with the client during the year and how available they would be for consultation when situations or opportunities changed. She emphasized that there are “no free lunches” and that most businesses are for-profit rather than charitable entities. Many of the entry-level accounts she manages earn her one percent, which is paid from earnings and deducted from the calculated rate of return.
Putting money in a savings account at a bank currently is a bigger risk than investing in the stock market, Jauregui says, because the bank’s rate of return is not keeping up with inflation. MyRA also is subject to inflation risk. Alternatively, there are day-to-day ups and downs in the stock market, volatility she calls “the new normal.” These vastly different scenarios support the case for ongoing research and understanding market influencers.
“I am a researcher,” Jauregui said. “It’s my job to do the research. It’s what [my clients] are paying me for. I am [their] eyes. I give [their] money a voice.” QCBN
Photo:
Grand Canyon Financial owner Nancy Jauregui says the key to investing for retirement is education and grit.
Photo by Sue Marceau
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