I thought President Obama was slurring his words during the State of the Union speech when he spoke about “myRA” accounts. It turns out it is a new program he is proposing, saying that it does not require new legislation to create (not sure how that works). Some details on the program are given in this Reuters article.
It certainly is a great thing to get people saving for retirement. Almost everyone will need to have money for retirement and almost everyone makes enough during their lives to provide for a comfortable retirement if they would save and invest. Still, with a limit of $15,000 and yields of 2% or less, I’m not sure that this new myRA is the best way to go. With that low a limit, and that low a rate of growth, someone might only be able to pay for a year of retirement expenses before the funds were depleted, and that is assuming no large medical bills
A better alternative would be to allow workers to direct their Social Security payments to a traditional IRA or a Roth IRA instead of the money going into the abyss of the general fund as is currently done. All workers currently contribute about 13% of pay per year, which is about $3900 per year, or $325 per month, for someone making $30,000 per year. Over a 45 year career, even assuming no raises, that would create a $1.7 M account (in current dollars) at retirement if 8% were earned per year after inflation. That could provide about $68,000 in income per year (in current dollars) for life if invested in an annuity at retirement or 4% were simply taken out each year.
A common argument against this is that this would be risking money in the stock market, while traditional Social Security and the proposed myRA accounts would be in safe, guaranteed investments. The ability for both of these programs to provide the specified benefits, however, relies on the government’s ability to continue paying benefits. This capability will come very much in question over the coming years as the national debt soars and the number of retirees drawing Social Security and Medicare grows. Even if the national debt doesn’t become unwieldly and the US Government’s ability to borrow at very low interest rates continues, the income of the Federal Government is directly related to the prosperity of the economy. If enough US businesses fail to cause a risk to IRA plans, there won’t be any revenues going to the Federal Government either. The converse is not true, in that a default of the US Government will not necessarily result in a crash of US company stocks.
So how would individuals who are not familiar with investing be able to manage a portfolio of stocks? The answer is that they would not need to do so. Deposits could be invested automatically in a total stock portfolio when a worker is 20-30 years old. At age 30, 10% of the funds would be shifted into a total bond fund. This would continue, with 10% of funds shifted into bonds with each passing decade of a worker’s life. At age 70 a worker would have an appropriate portfolio of about 40% stocks and 60% bonds. Simple.
Note that in some ways this would be what Social Security was supposed to be – young workers paying in while older workers pull money out. As older workers are selling stocks and using the money for their expenses, younger workers will be buying stocks and supporting the prices of the funds. The only difference is that the value of the funds will increase automatically with inflation, since the value of the companies will increase with inflation, and the growth in the value of the companies owned by the funds will result in a wealth compounding effect. The existing system does not have this wealth compounding effect since all funds are spent as they are received.
So, instead of creating myRAs, how about we look at improving the existing government retirement program – Social Security. It already collects plenty of money to provide a comfortable retirement for even workers just above the poverty level. The secret is to allow workers to invest the money they already contribute.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.