Federal retirement-savings plan finally arrives

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In November 2015, Department of Treasury took the wraps off the myRA, which is the federal retirement-savings program for those who don’t have one through work.

The program (myra.gov) is little changed from when we reported on it in our September/October 2014 issue. It remains a no-fee Roth account, which means that withdrawals are tax-free. However, the myRA now has no contribution requirements, and you can deposit money to your myRA account through your checking or savings account or your federal tax refund.

An important facet that didn’t change: The myRA consists of a single investment option—Treasury bonds. Your annual return on investment from this vehicle typically is no more than 3 percent, so criticisms remain that money that’s invested in a myRA won’t benefit consumers in the long run.

Greg McBride, who is a financial analyst at Bankrate.com, tells us that it doesn’t matter that Federal Reserve is expected to continue to raise interest rates for the next few years. Rising interest rates make low-risk bonds a more attractive investment compared with higher yielding stocks. “When rates go up, that means inflation is going up, too,” he says. “Now rates are at 1 percent and inflation is at 2 percent, but if you’re getting 4 [percent], that means that inflation is at 5.” He says the rate of return on the myRA has to outpace inflation for it to be a good option.

Although financial planner Michael Kitces of Pinnacle Advisory Group concedes that stocks typically provide a better return than do bonds over the long term regardless of where interest rates are, he adds that the rate of saving is beside the point with the myRA. He believes that it’s an excellent option for low-income consumers or those who are starting to save because of the stability of the investment—it can’t decline in value.

“The last thing I want to see is people spending 2 years slowly building up their first $1,000 of savings [in stock funds], then a bear market comes along, they lose 30 percent and they say, ‘I don’t need investing,’ and they pull everything out of the myRA,” Kitces says. By doing that, the panicked investor would lose the inevitable stock-market rebound and accrue less wealth over time by keeping only a low-interest savings account.

The myRA has a maximum amount of $15,000 and duration of 30 years. After that, it must be turned into an individual retirement account (IRA), which can include riskier investments. Of course, participants can start an IRA at any time.

“When you’re just getting started, the fact that you save is way more important than what you invest in,” Kitces says. “Once [consumers] get a little more comfortable in saving and after some growth—not much, but it’s growing—they can take more risk.”