Dear Carrie,
My son, who is in his late 20s, has a job with a small company that doesn't offer a retirement plan. He doesn't make a lot but, even so, I've been trying to get him to start saving. What do you think of the new myRA? Would this be a good choice for him?
--A Reader
Dear Reader,
Helping people realize the importance of saving for retirement is one of my personal causes, so anything that gets people talking about ways to save should be seen as a plus. I don't think that the myRA account is the ultimate path to a secure retirement, but I do think it could offer people like your son a good first step. It will be a baby step, but at least it will be a step in the right direction.
As I always remind people, the younger you are when you start saving for retirement, the better. Start in your 20s and you should be fine by putting just 10 percent of your annual salary away every year until retirement. That sounds easy enough. But how do you get young people who are having trouble making ends meet to even think about saving for the future?
Here's where a savings vehicle like the myRA account can be a kick-starter.
The Basics
In certain ways, a myRA is similar to a Roth IRA. Annual income limitations are the same (up to $129,000 for individuals; $191,000 for married couples), and the maximum annual contribution is $5,500. Contributions are made with after-tax dollars and earnings and withdrawals are tax-free. In fact, the myRA isn't only similar to a Roth IRA -- once the account reaches $15,000, it will have to be rolled over into a Roth.
But in spite of the similarities, for people like your son, who may initially feel that saving for retirement on his current salary is out of the question, the myRA offers a few extra inducements to get going.
Specifically:
•You can open a myRA account with as little as $25. Most other IRAs require a much larger initial deposit. That's one obstacle met.
•Ongoing contributions can as be low as $5 -- not a lot, but when you're on a small salary, every penny counts.
•The money will be automatically withheld from a paycheck and deposited into the myRA.
•myRA savings will be automatically invested in the Thrift Savings Plan Government Securities Investment Fund, so there's no investment knowledge required -- and virtually no investment risk.
Plus, all an employer needs to do is deposit funds directly from an employee's paycheck into the account. There are no fees or ongoing administration required.
On the employee side, the myRA should counter arguments about not having enough money or not knowing what to do with savings. On the employer side, it should quell any concerns about cost or complexity.
The Pluses -- and the Potential Minuses
On the surface, that all sounds pretty positive: It takes very little money to get started, you can save in small increments according to your budget, and since the money is taken directly from your paycheck you won't be tempted to spend it somewhere else.
So what's the downside?
To me, it's the potential for false expectations. I'm concerned that folks will assume that having a myRA means they don't have to worry about retirement. However, nothing could be farther from the truth. Let's say you save $40 a paycheck and you get paid twice a month. That amounts to less than $1000 a year. While it's something, even if you save that amount for 30 years, you're not going to have anywhere near enough to retire.
Plus, even though it sounds appealing to invest in a guaranteed fund with no investment risk, as is proposed for the myRA, returns may not even keep up with inflation. At best, it's kind of like running in place.
So as I said, the myRA can be an important first step, but it's absolutely essential that you turn that step into more of a marathon.
How To Take It Further
It will take the coming year for the myRA to be put into motion and get employers on board. In the meantime, I suggest helping your son get a broader financial education.
Talk to him about your own retirement goals and plans. How much do you estimate you'll need? How close are you to that number? If you have a 401(k), let him know the percentage of your salary that you're saving and show him how it's invested. Explore some online retirement calculators together.
If your son has the opportunity to participate in a myRA, great. But he doesn't have to wait until it's available. He could start his own automatic savings program by setting up a direct deposit from his checking account to a savings account, perhaps monthly. If it's possible, you might offer to match a portion of his savings as an added incentive.
The real value of the myRA is that it encourages the savings habit. You can help him do that in many ways right now.
Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
Read more at http://www.schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
COPYRIGHT 2014 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (0514-2609)
