Latest News & Current Events

Is retirement for the middle class a fantasy?

In his State of the Union address, President Obama introduced a new retirement plan called myRA which is shorthand for “my retirement account.” The goal is to encourage middle to low income individuals to get in the habit of saving for retirement. The plan rules are styled similar to the rules for the Roth IRA, including no tax deduction for contributions; tax deferred earnings; and tax-free withdrawals at retirement.

A new study, in the Financial Analysts Journal, says that "retirement is not hopeless." Indeed, all you need to do is save 22 times the annual income you hope to have when you retire. That means if you make $150,000, and hope to retire on $100,000 a year, you only need to sock away $2.2m in a bank account to be able to retire comfortably.The authors of the study assume you will live to be 100 years old, by the way, if not 105 years old.

The Wall Street Journal calls this arrangement "retiring on your own terms."

You can call it retiring on your own terms, the same way you can call buying a private jet and a house in Palm Beach, Florida living on your own terms – the terms, that is, of fantasy and not reality.

It's simply a math problem. Let's say you are in your 40s, making $150,000 a year, a generous salary in almost any city in the country.  That $150,000, after taxes, becomes the slightly less dazzling sum of $100,000 a year.

$100,000 a year is still far more than many Americans dream of, particularly in this less-than-stellar economy, and certainly at the upper end of the middle class.

Now you have to save that money as well as living on it. How much can you save? A standard and sensible budget, advocated by LearnVest and others, is to use a simple formula called 50/20/30. This means that you spend 50% of your salary on expenses. Another 30% goes to lifestyle expenses – the things that make life liveable unless you prefer living in a hut: cable and phone plans, clothes, books, gym fees, childcare and pets, restaurants and entertainment.

Then the final 20% goes to saving for retirement.

This is a reasonable budget. If you save more than 20% of your salary for retirement, you're giving up enjoying your present life till you're over 60-years-old. Twenty percent for retirement is, by the way, an aggressive goal. Most people save much less.

So let's say that, with your net pay of $100,000 a year, you set aside 20% for retirement. That gives you $20,000 a year, saved, every year, to make your retirement as comfortable as possible. That's $20,000 a year you're now foregoing, not putting it into school fees, into trips, into anything you might need at the moment. It's locked away in a bank account, by the way, not in stocks.

And once you reach this pinnacle of saving virtue, how long would it take you to reach your goal of $2.2mn for retirement? Only a mere 110 years.

This is absurd.

Saving for retirement is a smart idea, and a necessary one, but stacking up bills in a bank account and eating ramen every night won't get you there; it is both utterly joyless and totally ineffective.

So what should you think about when you retire? Retirement should include some thought to regular income – dividends, rental properties, insurance contracts – and a decent investment plan.

The retirement issue in this country is less due to personal failure than structural failures. Saving enough is not the primary problem with our retirement system. The primary problem is that wages have been dropping for decades, leaving people with much less to save - especially people who live on far, far less than $150,000 a year. That's largely because corporations are hoarding profits, raising CEO salaries and skimping on what they pay employees. Corporate executives have been the big beneficiaries of this trend, with a jump of 876% in pay between 1978 and 2011, as the New Yorker's James Surowiecki pointed out. At the same time, corporations – and the goverment – have largely reduced or eliminated pension plans that provided a retirement backstop to millions of middle-class employees.
If only we could impose the same kind of discipline on corporate executives as we do on the middle class, perhaps we'd have a real answer to the retirement problem.

No longer feeling Middle class?  Here are the most important details about the myRA plan:

• Low minimum contributions. To encourage people who want to save but need to start small, the plan allows participants to begin with an initial investment of as little as $25 then add to the account with as little as $5 per paycheck. This will be done through a payroll direct deposit by your employer.

• No administrative fees. Administrative fees can kill returns for small investors so with this plan there are no fees … meaning if you invest $25, the whole $25 goes into your account and the government (taxpayers) is footing the costs of administering the plan.

• Investments are 100 percent guaranteed by the federal government. A lot of people are frightened by the stock market and tend to panic out of the market at just the wrong time. All funds in the myRA account are invested in government savings bonds that are fully guaranteed so you won’t ever lose your money. The obvious downside is that your returns, at least in the current interest rate environment, will be very modest. Estimates for returns for this year are in the 2 percent to 3 percent range.

• Portable. If you change jobs, you can take your myRA with you. One important aspect of the program is that part-time workers are included. In this job market, a lot of people are working multiple part-time jobs and you are allowed to contribute to your myRA from each of those jobs if you wish.

• Access to your money. With a myRA, you always have access to your contributions so if you have an emergency, you can get what you put in without any penalties or tax consequences. However, if you take out your interest earnings before age 59½, it will be treated as income for tax purposes and you may also face a 10 percent federal early withdrawal penalty.

• Tax free access at retirement. After you turn age 59½, all withdrawals (both principal and interest) are tax free … forever!

During the initial roll-out later this year, the president intends to target companies who do not offer retirement plans such as a 401(k) but the myRA can be used to supplement a 401(k) if you meet the eligibility rules. Like a Roth IRA, you’ll be able to contribute up to $5,500 per year and everyone who makes less than $129,000 per year ($191,000 for joint filers) is eligible for a myRA. Once the account reaches $15,000 (or 30 years) it must be rolled over into a regular Roth IRA.

So is a myRA account a good idea for you? Americans continue to under-save for retirement so I’m in favor of anything that encourages people to save money. If you fall into the category of “I’m not saving any money and I’m afraid of the stock market,” then a myRA is a good choice for you. It lets you start small and get in the habit of saving money through an automated savings plan. For more information visit www.treasurydirect.gov/readysavegrow.


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