Saving for retirement can be a scary thought. Between understanding what a Mutual Fund is, the S&P; 500, an EFT, a ROTH IRA and all the other retirement lingo, you can easily talk yourself out of investing because it’s just too confusing. That could very well be the worst decision you could make for your financial future.
While Financial Planners sometimes disagree about the particulars, one thing they are in full agreement about is the power of saving for retirement as early as possible. Even Albert Einstein is supposed to have said that compound interest should be the 8th wonder of the world.
The question remains, though, where and how do you begin with investing?
What is myRA?
In 2015, the U.S. Department of the Treasury announced the launch of a new retirement investing product, myRA, that works a lot like a ROTH IRA on training wheels, to help solve your retirement investing dilemma. myRA was designed as a starter retirement savings account for those who don’t have access to a 401(k) at work, and for those who are ready to dip their toes into retirement savings but who aren’t ready to face the volatility of the stock market.
The mechanics of myRA are pretty straightforward. There are no fees to sign up, and you won't receive a book of complicated investment options. In 2016, you can contribute up to $5,500 if you are under 50 years old and $6,500 if you are over 50. Your investment is in a United States Treasury savings bond, which is backed by the United States Treasury. This means that your investment is guaranteed not to lose money. The Treasury bond earns interest at the same rate as investments in the Government Securities Fund for federal employees. On average, you might see 2-3.5% return over a ten-year period.
Eventually your myRA will grow up into a ROTH IRA
Once you've reached either $15,000 in investments and interest earnings or 30 years from the date you start your fund; your money is then rolled into a regular ROTH IRA. From there, you can continue investing and growing your money in all sorts of different funds. At any time prior, you can also roll your money into a ROTH IRA without any penalty.
Since myRA just rolled out last year, it’s too early to tell how well this plan will work. It’s a good option for someone who wants to get a taste of investing without having to stomach the stock market fluctuations. However, with bank saving accounts on average earning .02-1% interest and CDs earning about 2-3%, myRA doesn’t offer a stellar return on your investment. It’s safe, but it’s certainly not earning the amount of interest that you will need to retire in the future. On top of that, factor in inflation at somewhere between 2-3% and your return fares even worse.
Good for starting off, but not for long-term retirement planning
It’s important to remember that the younger you are, the more risk you can bear because of how many years you stand to benefit from compound interest. Also, life expectancies are growing, and that means that many of us might live well into our 90s. If you retire at 65 or 70, you could spend 30 years or more in retirement, which means you will need to have a considerable amount money to help fund your retirement.
For example, a thirty-year-old who needs $75,000 in after-tax retirement income in today's dollars would need to amass over $5,400,000 from now until age 70 to fund twenty years in retirement. With a maximum contribution limit of $15,000, myRA falls short.
However, if starting out in myRA boosts your investing confidence and gives you some experience, then the product can’t be faulted.
It’s always important to look at all your options when you are starting a retirement fund. Make sure you have a full understanding of what your company offers before you make a decision. With Robo-advisors like Betterment and Wealthfront, hiring a professional to help you make wise investing decisions has never been easier and more affordable.
If you’re looking to make the first leap into investing, myRA seems like a decent place to start, as long as you have a plan to jump in the "big leagues" before too long.