President Barack Obama has already taken action on one promise made during his State of the Union Address on Tuesday. He issued a presidential memorandum Wednesday empowering the Treasury Department to implement a new retirement savings vehicle, MyRA for “my IRA,” aimed at those with no access to traditional plans. While better than not saving at all, the Obama retirement plan may prove to be too little too late for most adults, particularly Baby Boomers, to develop any sizable nest egg.
Retirement savings plans, such as the 401K and traditional Individual Retirement Accounts were created more than 30 years ago to allow taxpayers to save on a pre-tax basis. The idea was to use tax breaks as incentives to encourage people to put money in their retirement plan. The Roth IRA was introduced in 1997 as a way to save post-tax dollars to minimize taxes due after retirement. All these retirement vehicles have not been as successful as planned.
A whopping 87 percent of adults are not confident that they have saved enough for retirement. Half of American adults have saved less than $20,000 toward retirement, according to the Employee Benefit Research Institute. Not surprisingly, it is the middle to lower income adults who are most likely to fall short.
MyRA hopes to encourage those in lower income brackets to begin savings for retirement. Households earning less than $191,000 could open accounts with an initial $25 and enroll to have as little as $5 per paycheck contributed into the retirement fund. Unlike traditional retirement savings vehicles tied to the stock market, these account balances would be invested in U.S. Treasury bonds and credited with the interest rate used by the federal employees’ Thrift Savings Plan Government Securities Investment Fund. Once participants have saved $15,000, their accounts could then be transferred to a regular private sector Roth IRA.
One issue with the plan involved the interest rate federal employees have been earning. The rate averaged 2.24 percent the past three years, or barely keeping pace with inflation. This is paltry when compared with an 8 percent stock market earnings average over time.
Saving the amounts allowed by Obama’s retirement plan will make too little impact for many who will begin saving too late for retirement. For example, if someone contributes $100 a month, using a generous 3 percent interest rate, their balance would accumulate less than $14,000 in 10 years. Considering most financial advisors recommend taking less than 10 percent out of a retirement account per year, this retiree would only have $1,400 a year to add to their Social Security money.
MyRA will allow people to participate who could not afford the minimums required by most retirement plans. However, it remains to be seen if people already struggling to make ends meet will participate.
There are many details to be worked out before the plan is piloted later this year, such as how payroll deductions will be handled for small businesses. Other questions deal with how those self-employed would participate and whether large employers with 401K plans would now be required to offer two plans.
While there are concerns about the plan design, Obama’s retirement plan will at least get some people to set aside money who might not have been; too little too late is better than no retirement savings as all.
By Dyanne Weiss