With so few Americans saving for retirement – seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts – I applaud the new initiative known as the myRA, a takeoff on IRA or Individual Retirement Account, (Here’s a good primer) but it falls short for many people.
I have a better idea that can work for anyone.
The myRA is designed for people who don’t know how to save, may not know anything about investing and think they don’t have enough money to begin. You can open a myRA account with just $25 and add through payroll deductions as little as $5. If you reach $15,000 you must roll it over (transfer) it to a regular IRA account. (The myRA was designed because many IRA accounts require a minimum of a $1,000 or more to open making it out of reach of many workers.)
A big selling point to the myRA is that there are no fees which can really eat up small savings.
Here’s the only downside. Your savings must be invested in Treasury bonds which, right now and for the foreseeable future, are returning less than 2 percent interest. At that rate, it will take you a long time to accumulate that $15,000 cap which you could then turn into an IRA which allows you many more lucrative investment options, like stocks or mutual funds. (As you know from reading this blog, the overall stock market rises about 9 percent annually over the long term albeit with sometimes uncomfortable ups and downs along the way. Also, the stock market always involves risk unlike a Treasury bond which has almost zero risk.)
I have a better idea on how to get going on your own retirement account. Find brokers, Fidelity for example, that let you open an IRA with no minimum initial investment. Once you’ve opened an IRA account, you have access to mutual funds – I’m a fan of index funds – and you can buy them as an ETF.
Back up. What’s an ETF? An Exchange Trade Fund is a stock – that can be bought and sold like any other stock – but in some cases they can be designed to mimic a mutual fund or index. For example, the S&P 500 index acts similarly to the VTI, which is an ETF. Many brokers don’t charge a commission to buy certain ETFs so all of your money is working for you. Also, although opening an IRA may be free of charge with no minimum investment, some mutual funds have a minimum initial investment. By using ETFs, you can get around these roadblocks.
So we got myRAs, IRAs, index funds, ETFs. Right now your head may be spinning and you hate thinking about all of this which is why you don’t have a retirement account in the first place. It’s all too confusing, right? Here’s a solution. First, click on some of the links and read more. You don’t have to know everything all at once and what you learn will last you a lifetime. It’s an investment in yourself. Second, armed with what you’ve read here, talk to an online broker (Schwab, TDAmeritrade, Fidelity) and tell them how much money you have, how much you hope to save on a regular basis and see if they can help you get the IRA ball rolling.
Most important questions to ask: Fees, initial minimum investment, free ETFs, commissions.
You don’t have to know a lot about finance and investing to plan a successful retirement. You just have to ask the right questions and understand that there are ways to fund a retirement account that you probably hadn’t thought about. The myRA is a good idea for some folks, but I think you can do better if you put a little time and thought into it.
A former Washington correspondent for Business Week magazine, Larry Kahaner is the author of 15 books, including the best-selling Competitive Intelligence, a Book-of-the-Month selection that has been translated into six languages. He has also written Values Prosperity and the Talmud; Business Lessons from the Ancient Rabbis, The Quotations of Chairman Greenspan and AK-47; the Weapon that Changed the Face of War. Full bio.
His in-person, interactive, multimedia presentation titled Fiscal Fitness Boot Camp is available to colleges, universities and companies. You can email him directly at Larry Kahaner.
He is represented by Wolfman Productions, Inc.