Ask Carrie: Is the MyRA a good savings choice for my son?
My son, who is in his late 20s, has a job with a small company that doesn’t offer a retirement plan. He doesn’t make a lot but, even so, I’ve been trying to get him to start saving. What do you think of the new myRA? Would this be a good choice for him?
Helping people realize the importance of saving for retirement is one of my personal causes, so I see anything that gets people talking about ways to save as a plus. I don’t think the myRA is the ultimate path to a secure retirement, but I do think it could offer people like your son a good first step. It will be a baby step—but a step in the right direction.
Basically, a myRA is similar to a Roth IRA. Annual income limitations are the same, the maximum annual contribution is $5,500, contributions are made with after-tax dollars, and earnings and withdrawals are tax-free. But in spite of the similarities, the myRA offers a few extra inducements for a young person to start saving:
- You can open a myRA with as little as $25. Most other IRAs require a much larger initial deposit.
- Ongoing contributions can be as low as $5—not a lot, but on a small salary, every penny counts.
- The money will be automatically withheld from a paycheck and deposited into the myRA.
- Savings will be automatically invested in the Thrift Savings Plan Government Securities Investment Fund, so there’s no investment knowledge required—and virtually no investment risk.
On the surface, that all sounds pretty positive: It takes very little money to get started. You can save in small increments according to your budget. And since the money is taken directly from your paycheck, you won’t be tempted to spend it somewhere else.
So what’s the downside?
To me, it’s the potential for false expectations. I’m concerned that folks with a myRA will assume they don’t have to worry about retirement. Nothing could be farther from the truth. Say you save $40 a paycheck and you get paid twice a month. That’s less than $1000 a year. While it’s something, even if you save that amount for 30 years, you’re not going to have anywhere near enough to retire.
Plus, even though it sounds appealing to invest in a guaranteed fund with no investment risk, returns may not even keep up with inflation. At best, it’s kind of like running in place. So while a myRA can be an important first step, it’s absolutely essential to turn that step into more of a marathon.
Here’s where you can help. Talk to your son about your own retirement goals and plans. How much do you estimate you’ll need? How close are you to that number? If you have a 401(k), tell him what percentage of your salary you’re saving and show him how it’s invested. Explore some online retirement calculators together.
It will take the coming year for the myRA to be put into motion. But your son doesn’t have to wait. He could start his own automatic savings program by setting up a direct deposit from his checking account to a savings account, perhaps monthly. If it’s possible, you might offer to match a portion of his savings as an added incentive.
I think the real value of the myRA is that it gets people into the savings habit. You can help your son do that in many ways right now.
Looking for answers to your retirement questions? Check out Carrie’s new book, The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions (Crown Business, 2014), available in bookstores nationwide. Read more at http://schwab.com/book.
This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. COPYRIGHT 2014 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (0514-3015)