Our retirement system doesn't work very well for many young employees in our country, largely because too many young workers do not have access to a simple payroll-deducted retirement plan.
That is unfortunate, because money saved when you are young is more potent than money you put away when you are old. Compound interest is an incredibly powerful tool. With an average annual return on savings of seven percent, you could accumulate $1 million for retirement by saving $379 dollars monthly from age 25 to age 65. Wait until age 35 and you need to save $815 a month, at age 45 you'd have to save $1,909 and at age 55 you'd have to sock away $4,566 a month.
A survey by the salary website PayScale and Millennial Branding found that 47 percent of young adults between the age of 18 and 30 work at companies with less than 100 people and about a third of these small employers offer 401(k) retirement plans.
According to the U.S. Small Business Administration, in 2010, 98 percent of all firms in the United states employed less than 100 people. In fact, 36 percent of all employees in the country work at firms that have less than 100 employees. With no 401(k) at work, our young people could go to Schwab or Fidelity to open an Individual Retirement Account (IRA) -- but they don't. Compound interest is powerful, but inertia is even stronger. The Employee Benefit Research Institute (EBRI) estimates that less than half (47 percent) of workers age 25-34 have access to a workplace retirement plan. Sadly, one fifth of young workers fortunate enough to have a 401(k) plan don't contribute to them.
Millennials also switch jobs a lot. Data compiled by Fidelity shows that 44 percent of younger savers from ages 20 to 29 cashed out of their retirement plan and 38 percent of folks from ages 30 to 39 did the same. These young individuals usually cashed out of their plan when they switch jobs. These withdrawals are taxed as income and are subject to a 10 percent tax penalty.
I can see how a 30-year-old could look at an employers' retirement plan total of $5,500 and say there is no way I am going to retire on that, so why don't I buy a car or take a great vacation? But if you leave the money in the plan or roll it into an Individual Retirement Account (IRA), you would have $58,721 at age 65, assuming a seven percent annual return.
How do you know if you are on track for saving for retirement? Fidelity estimates that you should have one times you salary saved by age 35 and eight times by age 67 to be on the right retirement path. So if you are age 35 and you earn $40,000 a year you should have $40,000 set aside for retirement. But most folks are clearly not on track by age 35. EBRI indicates that 60 percent of workers between the ages of 25-34 have less than $10,000 in any type of savings.
President Obama wants more Americans to plan for retirement and he just announced the creation of myRA accounts to help you do this. Unlike IRAs, which usually require a minimum of $1,000 to open, myRA accounts can be opened with as little as $25 and additional contributions can be as small as $5. Employers should like them because they will not need to administer the accounts, contribute funds or invest the money. These accounts will never lose money, so a savers' account balance will never go down. If you change jobs, you won't have to switch your myRA, it is portable and can follow you to your new job. You must roll it over into a privately managed Roth IRA when it reaches $15,000.
A myRA, like a Roth IRA, requires that you pay taxes before you deposit money into the myRA account. So you won't get any income tax deductions. And you won't earn a lot of interest on a myRA, as they are invested in the Government Securities Investment Reserve, which has offered annual returns over the past few years that are lower than the rate of inflation.
myRA is not a panacea. But it will give workers who lack access to an employer-sponsored retirement plan a convenient payroll deducted way to begin to save for retirement. I hope that many small employers, that do not offer a retirement plan, will participate in this new program U.S. Department of Treasury program and help their young employees save for retirement and for a rainy day.
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