I’m an advocate for just about anything that will help people save for retirement. These days we are pretty much on our own, so I am hopeful that a new starter savings account will help people jump-start their retirement savings.
Experts used to talk about the sources of retirement income — employer-provided pensions, Social Security, and personal savings — as a three-legged stool. Now it is more like a bicycle. People are going to have to balance most of their retirement income on their personal savings and whatever they may get from Social Security.
For years now, employers have been eliminating traditional pensions, which had helped liberate people from the worry of figuring out how to invest money for retirement.
In an analysis, the nonpartisan Employee Benefit Research Institute determined that, assuming Social Security benefits are not reduced and people save for at least 30 years in a 401(k) account, they could have an annual income of at least 60 percent of their preretirement pay on an inflation-adjusted basis.
But here’s the thing. When left alone, many people won’t set up retirement accounts. Having retirement plans initiated by employers encourages people to save. But only about half of all workers have access to an employer-based retirement plan such as a 401(k), according to the Treasury Department.
In his State of the Union address, President Obama said he was authorizing the Treasury Department to create a starter savings account. It’s got a cute name, “myRA,” short for My Retirement Account. It’s targeted to low- and middle-income workers and will be simple to set up through a payroll deduction. Treasury is looking at a mix of small, medium, and large companies for a pilot program, which should be in place by the end of this year.
Although myRAs will be targeted toward workers who do not have access to an employer-sponsored retirement savings, they will also be available to anyone — with income restrictions — who has a 401(k) plan at work.
Many of the rules for myRAs will be the same as for a Roth IRA, in which you pay taxes on the money before you invest. When you withdraw your funds, including any earnings, they are not taxed.
Unlike a Roth, however, the way a myRA earns a return will be more like a savings bond and will be backed by the US government. People would contribute after-tax dollars. It could take as little as $25 to open an account, and contributions could be as low as $5.
Here are some of the other features of myRA:
■ Unlike a Roth, overall contributions are limited. Account holders can build savings for 30 years or until their myRA reaches just $15,000 — whichever comes first.
■ Participants will be subject to the same income limits as a Roth IRA, which right now is annual income of $129,000 or less for individuals and $191,000 for couples. Earn above those limits and you are shut out from contributing to a myRA.
■ Contributions can be withdrawn tax-free at any time. But earnings taken before someone is 59½ will be taxed.
■ The money invested in a myRA will earn the same interest rate that is available to federal employees in the Thrift Savings Plan Government Securities Investment Fund, which in 2012 had a return of 2.24 percent over three years.
■ The plan is portable. People can change jobs and continue to contribute to an existing myRA through any employer that offers payroll direct deposit.
I’m cautiously optimistic about myRA. I appreciate the effort of getting people started in saving something — anything — for retirement. But my cautiousness comes from concern about two things: the emphasis on low contributions and low returns.
I’m concerned that folks may think that saving $5, $10, or even $20 every paycheck will be enough even over 30 years. It won’t be. If workers get used to saving small amounts of money, they may not stretch themselves to do more. They may fall victim to the set-it-and-forget-it syndrome.
I’m also troubled about the low returns on the Government Securities Investment Fund. Yes, it’s safe. But your investment dollars have to at least keep pace with inflation. If you want to get a higher return, you have to take some risk with your investments.
Here’s my advice to Treasury. The starter savings accounts have to be paired with a really good financial education program. Don’t just hand out the information about myRA, but work with employers to offer financial classes in the workplace that focus on realistic retirement planning.
It’s not enough to open the door to a starter savings account. You have to show people how to overcome the issues that keep them down financially and unable to save. You have to push them — without scaring them with big numbers — to get in the habit of saving, and then save much, much more.