Americans are facing a crisis of epic proportions…
This catastrophe is going to shape the future of our country. And since it has already begun, it’s going to be extremely tough to resolve.
I’m talking about the retirement crisis.
Of the U.S. workers who responded to the 2014 Retirement Confidence Survey, 60% reported less than $25,000 in household savings and investments (excluding the value of their home), according to the Employee Benefit Research Institute.
Forget about a comfortable retirement – most people haven’t saved enough to retire at all!
In an attempt to address this dire situation, President Barack Obama has directed the U.S. Treasury to create a new way for working Americans to start their retirement savings: myRA.
This plan is targeted at the millions of Americans who currently lack access to workplace-sponsored retirement savings accounts.
Here are some of the details of the myRA plan:
- Individuals with an adjusted gross income of less than $129,000 – and couples with less than $191,000 – are eligible to contribute.
- An account can be opened with as little as $25.
- Contributions can be as low as $5, and total annual contributions are capped at $5,900.
- No fees.
- Easy-to-use automatic payroll deductions.
- Contributions to myRA will be after-tax – and can be withdrawn, tax free, at any time.
- Savers will earn interest at the same variable interest rate as the federal employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund.
Sounds great, right? Until you realize it already exists…
Thanks for Nothing, myRA
If you’re thinking the structure of myRA resembles that of a Roth IRA, then you’re right.
In fact, the White House even says, “The product will be offered via a familiar Roth IRA account.”
Also, each myRA account balance will be capped at $15,000 (or a period of 30 years, whichever comes first), at which point it will either have to be withdrawn or rolled over into a private-sector retirement account.
So, the retirement crisis is being addressed by what essentially amounts to another Roth IRA – one that happens to sport a low initial deposit and allows early withdrawals without a penalty.
But wait, it gets worse…
There’s a crucial difference between the myRA and a Roth IRA. The myRA account mandates that savings be invested in U.S. Treasuries.
That’s right – zero flexibility.
Now, many critics of myRA claim that investors will lose purchasing power over time in Treasuries. On the contrary, I’ve shown that Treasuries currently offer some of the best real returns among global government bonds. This may not always be the case, but I think Treasuries will be fine for the next few years.
Instead, I believe there are two bigger problems with a 100% allocation to Treasuries.
The first does relate to a low rate of return, but it has more to do with consumer debt.
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MyRA Problem #1: Till Debt Do Us Part
You see, the Americans targeted by the myRA program – workers with little or no savings – are also the ones most likely to be saddled with debt.
U.S. households have $683 billion in credit card debt. And as we know, the credit report of the average American is anything but pristine. Lots of people are struggling to pay their credit card bills. According to the Federal Reserve Bank of New York, nearly 10% of credit card balances are more than 90 days delinquent.
But even if all borrowers had top-notch credit scores, the rates that they’re paying on carryover balances are likely much higher than the rate that would be earned in Treasuries.
Indeed, earning sub-3% in a small myRA retirement account, yet paying 6% (or higher) on a credit card balance, isn’t going to get anyone closer to retirement.
So, before opening or contributing to a myRA account, overdue credit card bills should be paid off first.
The problem is, the President, as well as policymakers at the Federal Reserve, can’t very well tell people to pay down debt.
That’s because economic growth in our credit-based economy is largely dependent upon U.S. consumers continuing to spend money that they don’t have. After all, consumer spending is around 70% of U.S. gross domestic product (GDP).
Growth in debt levels is actually viewed as a good thing in the eyes of central planners.
MyRA Problem #2: The Young and the Risk-Less
The President is missing a golden opportunity to teach not only about the necessity of paying down debt and the benefits of saving, but also how to invest.
This is where the myRA plan fails miserably.
The plan invests solely in Treasuries so that it can be marketed as safe and secure. But this also means that myRA lacks two of the things that are crucial for investors – dividend growth and diversification!
This is a major problem, especially for workers who are in the early stages of building savings. These are the very people who should have a healthy allocation to equities.
Taking risk in the stock market at a younger age is the best way for savers to build a nest egg sizable enough to retire.
Essentially, young people should be less concerned with safety, and focus on capital appreciation and total return.
Better personal finance education is one way that our nation can address the retirement crisis.
No Yields for Old Men
Ultimately, the U.S. retirement crisis has two main aspects…
Many Americans are finding it hard to pay off debt, let alone save a sufficient amount to secure a safe retirement.
And by suppressing short-term interest rates, the Fed is effectively taxing those already in retirement, who have historically relied on income from short-term investments. Retirees are being forced to take on far more risk – as a result of zero interest rate policy – than they otherwise would be willing to bear.
While it’s commendable to encourage Americans to save, the myRA plan does nothing to address these two issues and has a serious flaw in its limited investment scope, as I’ve shown.
What are the challenges you’re facing as you invest for retirement (or in retirement)? Also, if there are any additional companies, sectors, or asset classes that you would like me to cover in depth, then please don’t hesitate to let me know.
Safe (and high-yield) investing,
Alan Gula, CFA