Ok, I’ll admit it; I was one of the few who watched President Obama’s State of the Union Address. What can I say; I’m an information junkie. The speech to me was boring and a retread of past speeches except for the unexpected announcement on the MyRA (My Retirement Account).
The MyRA got my attention; and as the pundits have talked about it now for a week, I imagine many Americans wonder what it is. As such, it is important for advisors (financial planners, insurance agents, etc.) to know the basics about it and, even more important, why it’s nearly a useless savings tool.
MyRA Vitals
-Who can contribute? Anyone making less than $129,000 a year ($191,000 for couples)
-Minimum contributions: $25 to open an account and then $5 per paycheck
-Maximum contributions: $15k (total accumulation over a 30-year period)
After 30-years, or when the balance reaches $15k, the money can be rolled into a Roth IRA.
-Investment options: Government Securities Investment Fund (G Fund)
The MyRA is a payroll deduction plan employees can use through employers.
Principle Protection–the president touted the fact that money can never be lost in the MrRA. That’s true because consumers are forced to invest in the G Fund (the same investment used in government employee Thrift Savings Plans).
Historical returns of the G Fund–ok, well, if the only investment option is the G Fund, what are the historical rates of return? In short, they are pathetic. The following are year-ending 2012 numbers.
1-year 1.47%
3-year 2.24%
5-year 2.69%
10-year 3.61%
Do you think the “average” investor will like the above-listed rates of returns? In my mind, they are pathetic.
Better off not using the MyRA
Investors would be better off taking their money home, paying taxes it (especially considering most of those contributing are in the lower income tax brackets) and putting that money in any number of different places.
Hype vs. Reality
Isn’t this what our federal government is all about these days?
I think so; and this is a classic example of a benefit put forth by the government that mathematically not only has little value but in my mind will cost employees money who use them (cost them money because they could grow more money by paying taxes on their income and investing it in any number of places that are expected to generate significantly higher returns).
Summary
The MyRA is really designed for someone who has little or no savings and wants to do something simple. You wouldn’t have gleaned that from the State of the Union Address which made it sound like something wonderful for most Americans.
I did this newsletter to give advisors the facts about MyRAs so when your clients ask you about it you will know what they are and be able to tell them that they are useless tools to use when growing their wealth. Then you can offer them alternatives that, in your opinion, will generate more money in retirement.
