In the Nation's Interest
A Guide to Obama’s myRA Program
by December 16, 2015
In the post-financial crisis world, many Americans, most notably Millennials, are woefully behind when it comes to saving enough for retirement. The National Institute on Retirement Security (NIRS) estimates that the U.S. retirement savings deficit currently stands between $6.8 and $14 trillion. These findings are contained in a new research report entitled, The Retirement Savings Crisis: Is it Worse Than We Think? While the aggregate deficit certainly raises a red flag about the viability of the current retirement system, the more micro-level data present even further concern:
• The median retirement account balance is just $3,000 across all working-age households
• When looking solely at those who are nearing retirement, that amount increases to just $12,000
• 45% of working-age households do not own any retirement account assets, whether in an employee-sponsored 401(k) plan or an Individual Retirement Account (IRA)
These numbers point to the stark reality that is the destitute state of retirement planning in the United States. In an effort to help combat this, the Treasury Department unveiled myRA (short for “my Retirement Account”) to help individuals with retirement planning and developing sound financial habits. The product has a few key features worth noting:
• myRA functions as a Roth IRA, meaning that contributions are made with income that has already been taxed
• myRA stays with an individual through job transitions
• Individuals can set up automatic contributions; however, individuals are not required to make ongoing contributions
• No minimum contribution is required
• Funds are invested in U.S. Savings Bonds, which average an annual return of 3.19% over a ten year period
• Investments are fully backed by the U.S. government, meaning individuals are protected against losing their principle investment
• After $15,000 worth of savings, you can transfer the account to an IRA, allowing for myRA to function as a retirement account on “training wheels”
These features should help to ease many of the challenges individuals face when saving for retirement. Millennials potentially have the most to gain from these benefits as it’s more important than ever for young people today to start saving for retirement early. A recent report from J.P. Morgan Asset Management established that many Millennials will have to finance retirements that are longer than the number of years they work. The myRA provides a great opportunity to look at how a “starter” savings account can assist with increased retirement savings levels over time.
Another benefit to Millennials is that myRA engages individuals in the retirement savings process outside of employer contributions. A 2012 report from PayScale revealed the median tenure for Millennial employees to be just two years—compared to seven years for Baby Boomers. While myRA may not come with the added benefit of employer or other matches, it does come with the flexibility of setting your own contributions, when you can, and the freedom to carry the account with you through job transitions. This is especially beneficial for certain constituencies including low-income individuals, college students, part-time employees, unemployed individuals, and entrepreneurs (note, these groups are not mutually exclusive).
Research has shown that individuals who have retirement plans through their employer have a higher amount of savings than those who do not. Oftentimes, the above constituencies do not enjoy access to employer-supported retirement accounts, making it difficult to adequately and consistently save for retirement. This is what makes the myRA such a valuable tool. While it may seem relatively intuitive that workers connected to retirement accounts save more, it speaks to the need to help connect individuals to retirement vehicles that will assist in their savings journey.
In a previous era, Americans were able to rely more assuredly on Social Security for support during their retirement years. These days, due to the increased degree of uncertainty around Social Security’s future, individuals need to exercise more caution when counting on the program for maintaining their current standard of living through retirement. Moreover, Social Security remains the third rail of our political system, making necessary reforms unlikely in the near future. In the meantime, it’s important to look at a wide set of solutions to help support individuals in the retirement saving process. This includes enhanced education, better opportunities for automatic savings, increased incentives for retirement savings, and innovative products like myRA.
Bryan Ashton serves as an Assistant Director within the Student Life Student Wellness Center at The Ohio State University, overseeing financial education and outreach, Scarlet and Gray Financial peer to peer financial coaching and other functions related to student finances. Additionally, he is the Co-Founder and Co-Chair of the National Summit on Collegiate Financial Wellness.
Sean Hicks is the Outreach Manager at the Committee for Economic Development (CED).
Guest blogs do not necessarily represent the views of CED.