myRA accounts: Training wheels on the road to retirement?

The Treasury has unveiled details  of of the new myRA retirement savings plan announced by President Obama in his State of the Union address on Jan. 28. The accounts, which Treasury calls ‘a simple, safe and affordable way to start saving,’ won’t be available until later this year, but we can start examining the details now:

  • MyRAs will be Roth IRA accounts, initially offered through employers, and will be equivalent to savings bonds – backed by the full faith and credit of the United States.
  • Savers will be able to open an account with as a little as $25 and contribute $5 or more every payday.
  • MyRAs will be available to anyone who has an annual income of less than $129,000 a year for individuals and $191,00 a year for couples.
  • MyRAs are designed for savers who don’t have access to an employer-sponsored retirment savings plan, but the Treasury adds that people who ‘are looking to supplement a current plan’ can also participate. So that means myRAs are open to  everyone who qualifies for a Roth IRA and works at a participating employer.
  • Annual contributions will be capped at the Roth IRA limits: $5,500 per year (or $6,500 if you’re 50 or older).
  • MyRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees. This fund had a return of 1.89% in 2013, but that will change with market conditions.
  • Once a saver’s myRA reaches $15,000, or after 30 years, the balance will be rolled over to a private-sector retirement account. The Treasury hasn’t yet determined how this will be handled.
  • Contributions can be withdrawn tax free at anytime; earnings generally can be withdrawn tax free after age 59½.

Some thoughts. I can’t criticize any plan that will encourage people to save. The myRA proposal emphasizes safety and is built into an attractive Roth IRA package, offering tax-free money in retirement. It is simple, has zero fees and is extremely low risk, because balances can never decline. And use of payroll deductions will encourage ‘auto-saving,’ which is crucial to building wealth.

As an opening step, fine. But let’s say this is the sole retirement savings plan of a person in her mid 20s. She is investing in small amounts, earning less than 2%, and eventually building a nest egg of $15,000. Wouldn’t that person – who is young and can afford to take risk – do better by opening a Roth IRA and investing in a low-cost stock mutual fund?

This person needs to strip off the training wheels and really start saving for retirement, because $15,000 just won’t cut it. But if a myRA account gets that process rolling, and the $15,000 is smartly invested after it is rolled over, it is a good beginning.

I think the Treasury needs to set up protections for people who reach the $15,000 limit, because I fear these folks could fall prey to investment predators – bankers pushing  load-heavy mutual funds, insurance agents peddling high-cost annuities, day-trading ‘training’ schools, and on and on.

How can the Treasury move these myRA ‘graduates’ into customer-friendly investment houses like Vanguard and Fidelity? This will be a huge issue.

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21 Responses to myRA accounts: Training wheels on the road to retirement?

  1. Ed says:

    Mentioned is “… customer-friendly investment houses like Vanguard and Fidelity?”. Let’s evaluate them for informing people of inflation-adjusted asset price histories, such as:
    http://www.showrealhist.com/yTRIAL.html
    My evaluation (also for the entire financial sector) is: NOT trustworthy.

  2. tipswatch says:

    Ed, I agree that inflation-beating returns are crucial. The key factor with fund companies like Vanguard and Fidelity is that they keep investment costs extremely low, and actually do seem to put the customer’s interests firsts.

  3. Mel says:

    Will the myth of “Time Diversification” never go away? Meaning that stocks are less risky the longer you hold them. Probably not as long as Jack Bogle and Jeremy Siegel keep saying it over and over. If you go to http://www.norstad.com and look at the section “Risk and Time” you’ll see a graph that should change everyone’s mind about this. The idea that risk declines if you stick with stocks (even for decades) is just bogus. (Vanguard Total Market index 2000-2009 averaged to -3.5% annually adjusted for inflation.) Pretty nasty if you, say,were ten years from retirement. Mel

    • Ed says:

      Mel, Well written! There is so much apparent at a glance in the long term real asset price histories — that’s why they are seldom shown! Here’s a summary.

      The past is dominated by serial herd behaviors: “Real Homes, Real Dow” at
      http://www.showrealhist.com/RHandRD.html
      Individuals’ experiences were overwhelmingly timing-dependent. People uninformed of these serial herd behaviors are people fooled. This fooling of the people is USA history to date.

      • Mel says:

        I don’t know if their Dow chart includes dividends, so here is the data from Ibbotson’s Stocks, Bonds, Bills and Inflation annual, for the S&P 500 index with dividends reinvested, inflation-adjusted.
        1929- 1943 net return= zero
        1966- 1982 net return= zero
        2000- 2014 net return= zero
        15 years is a big chunk of time out of anyone’s investment horizon I would think….

    • tipswatch says:

      for people interested in the Risk and Time article, here is the correct link:

      http://www.norstad.org/finance/risk-and-time.html

  4. tipswatch says:

    Mel, one point about Time Diversification. Of course stocks aren’t less risky the longer you hold them, at least not for one single year, especially if you are holding them at the end point when the market crashes. However, when you are young and just starting out investing, you have a small amount of capital at risk. So let’s say you are 25 years old have have $15,000 invested in the stock market. Boom, you lose 40% one year and now you are down to $9,000. You lost $6,000. How much will $6,000 matter when you retire 40 years from now? You can make the up quickly. However, if you are 60 years old and have $1.5 million invested, all in the stock market, that same crash leaves you with $900,000 and you lost $600,000. That will forever change your retirement. You can’t make it up.

    Also, I owned the Vanguard Total Stock Market from 2000-2009 and I am sure I did a lot better than -3.5%. Why? Because I reallocated to the stock market after the crash and was steadily ‘auto’ investing all through plummets 1 and 2, and when the market returned to its previous high I had bought a lot of shares at a lot cheaper price. At the same time, as the market rose, I reduced my exposure to stocks.

    At any rate, we probably agree on this: Stocks are risky. If you don’t like risk, stay out of the stock market.

    (Your link went to a dead site, by the way.)

    • Mel says:

      I have held Vanguard’s S&P 500 index since 1979 myself, although my exposure has been minimal since 2000. Why? TIPS were yielding 4% then giving me a real yield of… 4% and the real value of my original capital back in thirty years. No argument that rebalancing will enhance your return IF you have the nerves for it. But how many will actually rebalance into a dropping, or even stagnant, market? Especially as retirement looms on the horizon? The return to a previous high could be longer than one’s remaining lifespan.

      MyRA, this seems like a bit of a con to me. What does a low wage worker need a Roth for? The only way I have ever been able to see its value is 1) You expect to be in a higher tax bracket when you withdraw or 2) You want to leave an inheritance that eludes taxes.
      If you are in a lower bracket when you retire you are far better off with the traditional IRA, by my calculations.

      Also, at the present time you can purchase I savings bonds in $25 multiples or TIPS in multiples of $100 from Treasury Direct. If this is supposed to be retirement money then being able to withdraw it easily from the Roth will only encourage foolish behavior. There have been cries of alarm about people treating their 401(k) money as a handy piggy bank now. The private investment account, who knows what that may mean? Mel
      (Sorry about the link confusion re Norstad)

  5. tipswatch says:

    Mel, all good points. Yes, I agree that TIPS yielding 4% above inflation and I Bonds very close to that were screaming good buys, but those days have passed. I also was lucky to have bought back then and it was also nice when I Bonds had a purchase limit of $60,000 a year, with credit card-purchases allowed. (Points!)

    Rebalancing to a set asset allocation is an crucial part of investing, and after the crash in 2000 I did it, and in 2008 I did it again, but I thought ‘never again.’ As the market recovered, I lowered my stock allocation, culminating in 2012 with stocks at 40%. I am comfortable with that because a 50% loss at worse means a decline of 20% in my overall holdings, but this would somewhat be mitigated by gains in the bond holdings. I could ‘live’ with that.

    The myRA accounts seem more a publicity ploy that a real attempt to create a usable retirement plan for lower-income workers. It just isn’t enough.

    At this point, with TIPS and I Bonds barely beating inflation, I don’t see those investments as the ‘sole’ solution. Taxes will eat away at the inflation protection. I consider them a solid part of my porfolio, an important part, and a major part. But not everything.

    • Len says:

      Simple person that I am why does rebalancing strike me as the old stock broker gimmick of “averaging down”? Buy 100 shares of XYZ @ $40. The stock falls to $20. Stockbroker: It was a good investment at $40, its a better investment @ $20. Buy 100 shares @ $20. Average cost = $30. ($6000/200) So if the stock goes above $30 you have a profit. In a month, a year, ten years?

      Same would apply to a stock market index except, historically, it wil return to the initial purchase price- someday. Meanwhile the initial shares are a loss until then. As someone showed elsewhere here it could be 10-15 years to recover. The assumption seems to be that the appreciation on the initial shares plus the appreciation on the later purchase will exceed what the money would have earned in bonds, TIPS, gold(?) over some, unknown, future time frame I don’t see it as an inviting bet for a retired person.

      • Ed says:

        If you adjust for inflation
        http://www.showrealhist.com/yTRIAL.html
        history shows a ton of structure!
        The financial sector leaves that nearly never seen — so they are NOT trustworthy!
        QED

      • tipswatch says:

        Len, I’d say re-balancing, when done systematically and without emotion, is a way to take profits from your current winners and apply those profits to the losing allocation. So if stocks are up 20% this year and bonds are down 4%, you’d move some money from stocks to bonds. And if bonds were up 10% and stocks were down 30%, you’d move some money from bonds to stocks, all the while keeping your set allocation. If you did this during the Internet boom pre-2000, you’d have been moving money into bonds, but gradually. If you did this after the stock crash of 2008, you’d be moving money into stocks, gradually, as they went down.

        And you don’t do this continuously, you do it on a set date each year. That takes emotion out of the picture.

        At the same time, as you get closer to retirement or your nest egg hits the target point, you can re-set your asset allocation to be more conservative. So you don’t stick with the same asset allocation forever.

        Re-balancing won’t work if one asset class continues to decline forever, but that has never happened before and I don’t see it happening in the future.

  6. Ed says:

    Mel, tipswatch, et al.:
    Here is the Real Dow history.
    http://www.showrealhist.com/RHandRD.html
    Some ride! NOTE that the composite average Dow stocks-holder took that WHOLE ride! Cash flow is separate, composed of dividends paid out, minus frictional costs paid to the financial sector. ‘Hide the ride’ is aided by doing reinvested dividends.
    The financial sector is 1/12 of GDP — charts are affordable:
    http://www.showrealhist.com/RHandRD.html
    The WSJ did do this once

    I can’t find who …

  7. ormondroyd says:

    I understand the theory of rebalancing, but when one asset class can be underwater for over a decade the reults are not certain by any means. 10 to 15 years for the overall market.three times in the last 100 years. It seems reasonable but is it? Or we could just look at Vanguard’s Balanced Index fund August 2000 to August to 2010, $21 to $21 over ten years with dividends and coupons reinvested. If any one is interested I’ll correct it for inflation which will make it even worse.

    Hell, Yahoo can’t even get my email account to work which fills me with trepidation of another sort.

  8. tipswatch says:

    Oromondroyd, everyone seems to insist on showing the worst-case scenario as a reason re-balancing doesn’t work, but if you just extend that timeline out from 2000 to 2014, the NAV increase of the Valance Balanced Fund is 32%, and that does not include dividends and interest. The latest 10-year total annual return for VBINX is 6.58% and since inception in 1992 it is 8.21%. Sure that looks good today because stocks are at a near all-time high (not adjusted for inflation, as Ed would point out). If I am going to invest in stocks, I would rather buy them when they are cheaper. Same with bonds, buy them when they are cheaper.

    Re-balancing certainly isn’t a sure-win. The main point is that you need to decide how much you want in stocks, and how much in bonds, and how much in cash or super-safe investments (like TIPS) and keep adjusting as you grow older.

    • ormondroyd says:

      Your points are certainly valid, but if I were retired, or within 10 years of retirement I would look very seriously at the time it takes to recover. Whether it be stocks or a rebalanced portfolio. Several people have commented to me how different things look when you no longer have wages coming in and are entirely dependent on your portfolio and SS. (After they finish gutting it.) Certainly true I focus on the worst case scenario- a habit I picked up designing airliners….

  9. Ed says:

    http://www.showrealhist.com/RHandRD.html
    Hide those rides!
    HIDE THOSE RIDES!
    Remember: The composite average asset holder took the WHOLE ride! Jack sells high WHEN Jill buys high!!!

  10. Len says:

    First praise for our host, I’ve recommended this blog to several people who’ve found it not only unique but highly useful. Well done. On the other hand following the conventional wisdom from Wall Street and the mutual fund companies and employers who want you to believe they are doing you a favor with a 401(k) instead of a pension I can’t agree with. Or that rebalncing with save your bacon when things go bad. So, a short reading list for the skeptical (or cynical).

    The Great 401(k) Hoax, William Wolman. Wolman was the editor of Business Week magazine for years, but he had to wait until he retired to write this bombshell.

    Surviving The Coming Mutual Fund Crisis, Donald Christensen, 1994. A noted financial writer he predicted all the mutual fund scandals that surfaced 2001-2006. (Fidelity paid out tens of millions in fines to the SEC and others were punished even more severely).

    The Great Mutual Fund Trap, Gregory Baer & Gary Gensler, 2002 Both the authors were with the Treasury department and show the pitfalls involved in trusting your money to the mutual fund companies.

    Without going into depth, these books saved me thousands of dollars – literally. Well at least Mel, Ed and Fred will enjoy them. But seriously there isn’t enough information showing the negatives of entrusting Wall Street with your money. If not your local library, try http://www.bookfinder.com online.

    Len

    • tipswatch says:

      Len, thanks for your praise and please keep recommending the blog. Thank you! Now, on to some of your points:

      1) I have worked for a newspaper company for 31 years and I had a pension from 1982 until 2008, when it was frozen, so my payout will never increase. That pension, by traditional measurements of 25x annual income at age 65, is worth $700,000.

      2) I also have a 401k with this same company, but all matching was cut off in 2008. That was a very bad time to end all matching, but that’s the newspaper business. I contribute the max each year, just for the tax shelter. My wife – different employer – has no pension but has a 401k that matches 6% and a cash balance account that adds 7% of year salary a year. She also contributes the max each year.

      Even though I contribute the max, my 401k isn’t as valuable as that pension.

      I agree that the pension was the far better option for the average worker, who might have saved very little but could get a decent return in retirement. Pensions were preferable, no doubt, but that was the past. The 401k is the perfect vehicle for re-balancing because of the tax deferral.

      In the real world, if you don’t have a pension and you despise 401ks, where are you tax-deferred options that can build real wealth? Where are you putting your money?

      • Len says:

        The 401(k). Well the “carrot” is of course the matching funds, otherwise why not just fund your own IRA giving you access to Vanguard? For smaller companies, from what I’ve seen, the employer just hooks up with some mutual fund outfit with very limited choices and all high expense ratios. POUND FOOLISH by Helaine Olen is another book I highly recommend for enquiring minds. Depending on the matching funds you could find yourself better off after a couple of decades using low cost Vanguard funds in your own IRA. Hard to believe I know, but the constant drain of 1.5-2% expense ratios can eat up a third of the account over time. Another point regularly overlooked, why should we hold stocks in a 401(k) even if it offers a market index? What we are doing is converting dividends and capital gains into ordinary income which has to be bad tax management upon withdrawal. The Roth IRA version has pretty limited appeal in my book And of course given the volatility of stocks we can never harvest any tax losses in the 401(k) or IRA either. If we are talking decades this can mount up significantly.

        Fortunately a couple of my employers had profit sharing plans which I then rolled into my IRA on departure. If we think about it the profit sharing was probably fairer than the employer just arbitrarily deciding what sort of 401(k) they feel like distributing. .Index funds are pretty tax efficient to begin with and Vanguard offers tax-managed ones as well.

        I certainly don’t have all the answers, but I am a veteran of several Fortune 500 companies. That said I have no illusions that the corporation is managed to benefit the employees, the customers or even the shareholders. Unless Pickens, Ross, Icahn or some other “raider” comes along management will lavish salaries and perks on themselves. After that they may indulge in some “empire building” doing mergers or acquiring other companies that makes no economic sense..

        Keeping in mind the caveats mentioned I think you’re doing a good job overall. Ever see one of those studies on the assets of pre-retirees? Perhaps $100K plus their primary residence!

        Yes it certainly bothers me that (I believe) people are being misled by Suzie Orman, Jeremy Siegel, and even to some extent Jack Bogle. The best information I ever found was by the late Nobel laureate Paul Samuelson (Journal of Portfolio Management) and he certainly didn’t believe that the risk of holding equities declines with time, for example. Those graphics in the risk article at Norstad.org are great. Thanks Mel

        And thanks to you for being so open-minded.

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