You have to start somewhere. When it comes to retirement savings, the first steps are critical.
According to a 2015 Federal Reserve Report, 31 percent of non-retired individuals said they have no retirement savings or pension whatsoever. Among workers who do not participate in a 401(k) or other defined contribution plan, 42 percent say it's because their employer does not offer one. And for part-time workers, it can be even more difficult. A 2015 BLS Economic Release found that 62 percent don't have access to a retirement plan at work.
With millions of people without retirement savings, a push from the White House in 2014 lead to the creation of myRA. These retirement accounts were developed to remove common barriers to saving and to give people who don’t have access to an employer-sponsored retirement savings plan or lack other options a chance to prepare for their financial needs in their golden years.
myRA is essentially a Roth IRA retirement savings account with no start-up cost and no fees. There are no minimum contribution requirements, making it possible to save in small amounts or whatever suits someone’s budget.
Individuals with earned income below $131,000 if single, head of household or married filing separately, or $193,000 if married filing jointly, may open a myRA. Contributing is simple. Money can be taken directly from a paycheck, a savings or checking account or by directing all or a portion of a federal tax refund to the account when taxes are filed. You can save up to $5,500 per year, or $6,500 per year if you are age 50 and older.
You can have a maximum account balance of $15,000, or a lower balance for up to 30 years. When either of those limits are reached, savings will be transferred or rolled over into a private-sector Roth IRA where you can continue to grow your retirement stash. Learn more here.
Do keep in mind, points out Joseph Carpenito, a financial advisor with Raymond James that much like a Roth IRA you can pull out principal at any time, but earnings withdrawn before age 59 ½ are subject to income taxes and a 10% early withdrawal penalty.
How is the money invested?
You don’t have to worry about not feeling like a financial expert to invest. Money in a myRA is invested a new United States Treasury security, which earns interest at the same variable rate as investments in the government securities fund for federal employees. This investment is back the United States Treasury and the account carries no risk of losing money.
One major mistake made with all retirement savings plans is invading the account. "You are robbing yourself of future assets and financial security," says Kate Crowther, director of government relations for Ubiquity Retirement + Savings.
The key to she says, is to adjust your contribution with increase in pay if the election is in dollar amounts, not percentages. Escalate the savings rate annually to maximize future benefits. "If you face a hardship, decrease your savings rate, do not cash out."
A good first step
Jamie Hopkins, professor of retirement income planning at The American College shared his thoughts on this new retirement option. "This is a surprisingly smart savings vehicle for someone starting out in their first job. Many planners and experts harp on the myRA for having a safe and conservative investment, but this is exactly what a first time saver should be invested in," says Hopkins.
There’s something to be said for safety when you’re an investing newbie. "Behavioral finance tells us if we put a new saver in a risky investment, like the stock market, and a 2008 crash occurs, we lose a lot of those investors forever," says Hopkins. "Instead, start with an easy to understand and safe investment early in their savings and move them to riskier investments as their tolerance for risk grows."
Although myRA has a significant limitation in that it has one investment option -- Treasury securities, Hopkins points out that myRA is really designed to be a starter savings vehicle and that it is to be one of many tools. It is to way to get in the habit of socking away money and to feel comfortable doing so. "While it doesn’t solve the retirement income shortfall that exists in the U.S., it is a step in the right direction."