Since the announcement by President Barack Obama of the MyRA idea as a retirement tool, many criticisms have arisen. Here is a brief summary of the most-relevant points.
Before saving for retirement or doing any investing, every person should have an emergency fund. This amount could range from expenses for a few months to six months. Only after fully funding this amount should anyone consider investing, especially in a retirement account.
Much has been made of the alleged “safety” of MyRAs. Unfortunately, this statement represents the height of financial illiteracy. Even if the account is essentially a series of quality bonds, the most you can say is that the principal is safe. But remember, as with all bond investments, there is the risk of lost purchasing power due to inflation.
One relevant observation is that MyRA is only a political move since Roth IRAs are much better for individuals to use. It is being done in a way that makes individuals “feel” better but the reality is that this type of account will most likely not earn enough interest to beat inflation.
Although the details of MyRA are not yet clear, it appears the total contribution allowed to this plan is $15,000. This amount is simply not enough to be meaningful for anyone during retirement.
Other retirement account types are superior both in terms of investments available and the amount eligible to contribute. Anyone with access to a 401(k) plan with an employer match should start there. Take advantage of this employee benefit. Lower-income taxpayers that don’t have access to an employer-sponsored 401(k) plan are better served with a Roth IRA.
This is not tax deductible; however, if the account is open for at least five years and you are over age 59 ½, then all of the distributions are free of income tax. Middle-income taxpayers may be better served with a regular IRA. Contribute on a tax-deferred basis. Distributions would be taxable. Simply sign up to have these funds withdrawn from your checking account monthly.
You need to consider a broader range of investments than MyRA provides. Most mutual fund companies offer IRA programs with many choices and the chance to contribute small amounts with little administrative cost.
The bonds suggested as an investment are a poor choice, especially when U.S. bonds are paying such paltry interest. Ironically, no more than week prior to the announcement of the MyRA, a study showed retirement investors are too conservative and invest too heavily in bonds, notoriously bad long-term investments.
The government guarantee may be misleading. Saving something is better than nothing, but people don’t need to save. They need to invest. Investments earn a real return, a rate above inflation. Anything with a government guarantee is sure to give you a rate of return that will not only be low, but it will be negative after taking inflation into account.
Emphasizing tax savings for low-income citizens misses the point. If someone doesn’t have $1,000 to open a Roth IRA, then they’re unlikely be paying taxes. A simple brokerage or bank account would almost serve the same tax benefits as a Roth IRA.
Matching funds from an employer as part of a 401(k) plan are a powerful advantage. This should be the first choice. Next would be a Roth IRA or a general investment account that invests in a tax-conscious way.
Will the government really keep its financial promises or is this just another way for them to gain access to more money? The government has not actually invested the funds kept for Social Security benefits. Why will this program be different? The issue of saving for retirement is very important but this approach is inadequate.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him at [email protected]