There is a common misconception that those who can afford to save do. The reality is most people fail to save, but instead increasing their lifestyle and living for today. A pair of doctors living paycheck to paycheck make just as much money as someone who works two blue collar jobs just to make ends meet. I met those doctors early in my career. As clients of a colleague, their combined annual income was one million dollars, yet they had no savings and were struggling to pay their bills each month. Financial literacy in this country escapes even the most well educated of us all. The answer to your financial goals is very rarely to make more money, but almost always to spend less and save more.
Barack Obama has introduced a new type of retirement plan which targets low and middle income households called MyRA in an attempt to help these people save more and give them a start at a nest egg. Half of Americans do not have access to workplace retirement savings plans, but have access to Traditional IRAs and Roth IRAs. So what do we hope to accomplish with MyRA? Are we trying to give an incentive to people to save? The program will act much in the same way as a ROTH IRA. The investor will save after tax dollars and be able to withdraw them after age 59 1/2 for use during retirement. The growth will be non-taxable.
There are some differences. Participants can use payroll deductions to automatically deposit earnings from their paychecks into their MyRA accounts with as little as $5 per pay period. The account will be portable so that the participant can remain with the same plan even if they change employers. Once the account has been open for 30 years or has reached a maximum of $15,000 it will transform into a ROTH IRA by default. Finally the account will be invested into Government Securities and be backed by the full faith and taxation power of the same.
On one hand, for those people who are only able to put away a few dollars per pay period, this might offer an easy way to save. On the other hand, this could be an easy way to watch people part with their hard earned money. Consider first that the only available investment option will be government securities. Historically, the government pays some of the lowest returns as it also has some of the lowest risk available. According to modern portfolio theory, a certain amount of diversification is necessary to a portfolio. Even Warren Buffet has been quoted saying, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” The people being targeted by this plan are in dire need of diversification.
It's estimated that this plan would be offered to half the US workforce or 77 million workers. If participants put in the minimum of just $5 per two week pay period, the number of dollars streaming into the government coffers could be into the staggering billions. As a politician looking for ways to stem runaway spending, it seems the President may have found a simple solution. The real problem comes from early withdrawals. Many people who are living paycheck to paycheck will find themselves in need of liquidity that they don't have. If this resource exists, they will tend to use it.
For example, I have a client who is a dental assistant. Having saved $17,000 into an IRA over the years, my friend contacted me recently to ask if it was possible to take a loan or access the money somehow since there would be a new orthodontic expense that required a $1,000 deposit. The mind quickly searches for places to access money in times of need and so many people look to their retirement plans, but our friends the doctors would be able to pay back a loan far faster than those of lower income.
What is the real motivation to offering this program? From my perspective the government has far more to gain than the low income investor who would do better to establish a certificate of deposit or savings account before entering into a retirement plan, even on this small of a scale. So those asking my vote for MyRA, I give it a resounding nay.