President Obama gave his 2014 State of the Union speech, and proposed a new retirement plan. The new government sponsored plan is called MyRA (a play on words for existing IRA plans) in which you invest in government bonds. Obama’s proposal is trying to target individuals who don’t have access to 401(k) retirement plans at work. Though traditional IRA, and Roth IRA plans were already setup for this purpose. So why create this new retirement plan? Damned if I know.
In brief, I don’t recommend you open a MyRA. There are much better options available.
My opinion of MyRAs could change, and if the proposed plan changes I will update this recommendation. The reasons I don’t recommend MyRA are as follows:
- Better Existing Options – We already have many other existing retirement options that defer taxes. Why does the government need to create a new one? Based upon the proposal, Roth IRAs are pretty much the same as MyRA for tax-deferment. The money goes in after tax, accrues and is withdrawn tax-free. If you wanted to invest in government bonds, why not just buy them via a commission free ETF in an IRA instead? Understand a government bond doesn’t have duration risk so an ETF isn’t exactly the same. Though if you buy a short-term bond ETF (under 5 years term) returns should be very similar. Though there’s really a larger risk as I mention next.
- Inflation Risk – The biggest issue with this plan isn’t the return OF your money, but a return ON your money. There’s no question you’ll get the money back that you put in. The United States government cannot go bankrupt, since they own a printing press. The issue is why is it when a private sector company makes claim of a return is risk free it’s a fraud, but if the government claims an investment is “risk free” it’s a good idea? Every investment has risk, even the proposed MyRA plan. Sometimes the risks aren’t as apparent, but always there. The problem with this plan is keeping up with inflation. The previous history of G-bonds (what MyRA are supposedly based upon) haven’t even kept up with the average rate of inflation. So it’s possible you are losing money in real terms. That’s a potential big issue considering we are at one of the lowest points in history for bond returns.
- Start Investing With Bonds?!? – It’s a noble idea that MyRA gets individuals to start saving for retirement. The simple idea is if you are starting to invest, you should invest into just bonds is preposterous. Assuming MyRA is targeting young individuals (after all they typically have nothing saved), the last thing you should be invested in is bonds. When investing for a long-term goal (i.e. retirement) you want want to not only keep up with inflation, but you want returns above and beyond the rate of inflation. The only investment vehicle proven to do this long-term is stocks. The classic phrase “youth is wasted on the young” applies to investing. When you are young you have time on your side, and can afford to take more risks. So even if the stock market were to crash in the short-term, the long-term you historically would do much better investing in stocks compared to bonds. Ironically when closer to retirement is when you shouldn’t be taking as much risk. Which more than likely exclude you from MyRA. I would hope you had more than $15,000 saved for retirement.
- Total Limit is $15,000 – Why does the proposed MyRA plan only limit to $15,000? Once you reach this amount, you must transfer the money into a Roth IRA plan. In today’s dollars, $15,000 wouldn’t cover one year of retirement for most individuals. Instead this would be a waste of government resources to manage these small investment plans. IRAs have a $5,500 annual limit ($6,500 if over 50 years old) with no maximum value amount. You are best off to start and stay investing with an IRA plan.
- Low Deposit Minimums Already Exist – Individuals qualify for IRA based upon income, and if an employee sponsored (ie 401(k)) plan isn’t available. IRAs can be setup with a brokerage account rather quickly and easily. They have low minimum setup requirements (under $500 in many cases), and almost all can automatically withdraw from your checking account. Granted MyRA will allow for much smaller deposit amounts ($5 per deposit), but that small amount (like the maximum limit) isn’t going to help you with retirement. It’s like filling a pool with a spoon.
The problem isn’t we need more options for retirement. As I’ve mentioned in a previous article, the issue individuals need to save less than they earn, and do it much much more than they are currently.
If anything, MyRA will hurt the very individuals who need to save for retirement the most. If your investments aren’t keeping up with inflation then you are losing money in real terms. These individuals need to take more risk with their investments, not less.
My issues with MyRA don’t even go into the semi-conspiracy issues such as this is an entry point for the government to force all retirement plans to invest in government bonds. Lets also forget the legality of what Obama proposes as he plans to do this via an executive order.
At minimum, it’s been said the automatic withdrawal from an employee’s paycheck service would require congressional approval. The rest of the MyRA proposal is pretty much an extension of existing Treasury services. So who knows the legality, and if it won’t be tested in the court of law.
Instead of getting a MyRA, I would recommend opening an IRA through a brokerage firm. If unsure of what you should do for asset allocation, I would recommend Betterment (find out why we like Betterment).
Betterment has a deposit requirement of $100/month. Otherwise if you deposit less, has a $3/month service fee. If starting with nothing, their annual fee is 0.35%. Low enough for the value added to be well worth giving you proper asset allocation. Risk can be adjusted per your time horizon, and not just 100% in bonds like MyRA proposes.
While the minimum deposits for Betterment are higher than a MyRA, it’s shouldn’t be a issue if you are serious about retirement. $100 a month comes out to $3.33 per day. If you cannot figure out how to reduce that amount of expenses in your life, you have bigger issues to tend to. You should be focusing on how to generate more income.
For retirement you should be saving at least 10% annually. Ideally 20-30% is a more realistic goal to have comfortable retirement. Obama’s MyRA proposal will not solve the issues facing individuals wanting to plan for retirement, and is purely smoke and mirrors.
We should be saving more for retirement, and figuring out how to make more income — basically being more responsible for one’s actions. Something you will never hear from President Obama.