In personal finance, there is rarely something new. That’s why lots of ears perked up during the State of the Union address when President Barack Obama announced a new kind of retirement savings. He called it the MyRA — to rhyme with IRA, for individual retirement account. “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,” the president said.
So what exactly is this MyRA? And is it a good idea for you? Maybe, but not necessarily for the purpose intended.
Not everyone has access to existing retirement accounts, the employer-sponsored 401(k) and the IRA.
Half of all workers and 75 percent of part-time workers lack access to 401(k)s, and banks often require minimum balances as much as $2,000 to open an IRA, although sometimes this is waived for those who sign up to make automatic contributions.
The MyRA is designed to be offered through an employer — in 2014, a group of pilot employers will make it available. Initial investments could be as low as $25 and contributions as low as $5 could be made through automatic payroll deductions. Savers can keep the same account when they change jobs and can roll the balance into a private-sector IRA at any time.
When the balance reaches $15,000, or after the saver has held the account for a maximum of 30 years, it must be rolled over. To qualify, a participant’s household must earn less than $191,000 a year. There are no fees, and money can be withdrawn at any time with no penalty.
Confusingly, the MyRA, unlike the 401(k) and IRA, isn’t just an account. It’s also a specific savings instrument within the account.
Full details haven’t been released, but this is likely to be a government-backed security similar to a savings bond that can’t ever go down in value. The annual rate of return on this security will vary from year to year. It will be the same as the Government Securities Investment Fund, a security that federal employees have access to through the Thrift Savings Plan.
This fund pays far more than a savings account does these days, but not too much more than inflation. The average rate of return over the last 10 years was 3.6 percent per year.
What all this adds up to is that the MyRA fills a niche in the market. It’s a great way to get folks started saving for retirement who otherwise might not participate in saving, especially young people and those working part time.
And it further reinforces the idea that direct deposit is the way to go when it comes to retirement savings. In fact, through his budget proposal the president is seeking to introduce an “auto IRA” to allow a larger number of workers to contribute to their retirement automatically through payroll deductions. (Of course, you always have the option to set up an automatic monthly transfer from checking to a retirement account.)
But the MyRA is designed to get the ball rolling, not to be your ticket to Easy Street. It should go without saying that $15,000 is a tiny percentage of what you need to retire on. And the rate of return offered just is not high enough to be the only type of investment you carry.
If you have decades until retirement, you need to be trying to capture the rates of return available through the stock market. It’s true that stocks can lose money, but in order to accumulate enough to retire on, it’s necessary to take that risk.
So in sum, the two best ways to use the MyRA are first, as a way to build up the minimum balance you need to start an IRA, and second, as a backup savings account.
Contact Anya Kamenetz at email@example.com.