It’s easy to put nest-egg saving on hold when it feels like retirement is a million years away. After all, there’s no shortage of immediate expenses to think about—rent, student loan payments and credit card bills, just to name a few. The procrastination becomes further prolonged if your employer doesn’t offer a 401(k) plan—giving you an excuse to put off saving for another day.
Unfortunately, according to a 2016 report by Pew Charitable Trusts, more than 30 million full-time employees in the U.S. don’t have the option to save in a workplace-sponsored retirement plan—a major barrier to saving, says Melissa Koide, the deputy assistant secretary for consumer policy at the U.S. Treasury Department. The Pew research also indicates that minorities, young people, women and small-business employees are the most likely to lack access.
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In an effort to address these obstacles and create a pathway for more Americans to begin saving for the future, the White House and U.S. Treasury launched myRA, a free federal retirement savings option that invests retirement contributions into a Treasury savings bond. President Barack Obama first revealed plans to establish the program during his 2014 State of the Union address.
“The Obama administration recognizes that a Social Security check is often not enough,” Koide explains. “With so many people lacking access to a 401(k) or other type of retirement savings plan, myRA is an option that allows people to begin building a savings habit.”
Since its implementation late last year, more than 10,000 people have enrolled in myRA, she adds. We spoke to Koide about the program, why planning for retirement just can’t wait and which groups myRA aims to benefit.
Why is it so important for people to take responsibility of their retirement early in life—and why is it so hard to get young people to think of retirement as a serious goal?
Young people have a lot going on. They’re often working to find a balance between saving for large purchases such as a car or home, paying down debt and saving for the future—all while managing day-to-day expenses. With so many priorities, it can be tempting to procrastinate [saving for retirement], especially for young people who don’t have access to a workplace-sponsored plan.
However, the reality is that starting to save early in your career and using the right mix of savings and investment options can make a big difference in your long-term financial security. The potential to achieve a safe and secure financial future is increased remarkably when you begin long before you plan to retire. The Center for Retirement Research at Boston College estimates that workers who start saving at age 25 need to set aside 15% of their annual income throughout their career to accumulate enough for retirement, while those who start when they’re 45 need to save 44% of their annual income going forward to save the same amount.
What hurdles or mental blocks do you think people have when it comes to starting to save for retirement?
In addition to not having access to an employer-sponsored retirement savings plan, some people are intimidated by the various savings options available to them and the potentially complex choices they need to make when it comes to investing money. Others find it difficult to get started because of the high costs and fees associated with opening and maintaining an account. Some people are concerned about losing money, and others want to make sure they have access to their funds without having to pay a withdrawal penalty in the case of an emergency. Still others are simply trying to find a way to begin saving.
With myRA, we wanted to create a product that made saving easier than ever before and addresses these barriers. myRA costs nothing to open and there are no fees to maintain the account.
You’re particularly passionate about helping young women build positive financial habits.
Women enter retirement with significantly less money saved because of a number of factors: Median earnings for women working full-time are 79 cents on the dollar of what men earn. In addition to receiving lower wages, women are more likely than men to leave the workforce while they focus on parenting and caregiving. In 2015, the labor force participation rate of women ages 25 to 54 was approximately 17% lower than that of men in the same age range. Also, more women than men work part time, which can make them ineligible for employer-sponsored savings plans.The good news is that when women have the opportunity to save for retirement at work, they are actually more likely than men to enroll and typically save a higher fraction of their incomes.
So how specifically could myRA help them with these challenges?
[It] provides the flexibility that many women need. It allows them to save the amount that fits their budget. They can start and stop contributing as they enter and exit the workforce, and the account is portable for women who work (sometimes multiple) part-time jobs.
But ultimately, anyone without access to a retirement plan at work is encouraged to take advantage of it. So what are you hoping myRA helps people accomplish for the long term?
myRA is designed as a starter retirement account to help bridge the savings gap for workers who have nothing saved for retirement and need an easy way to build a savings habit.
Sometimes simply taking the first step to saving is the biggest challenge. Opening a myRA account can go a long way in helping new savers build confidence and know they’re taking steps in the right direction. Our hope is that it can serve as a bridge to other savings options that will carry them the rest of the way. myRA alone will not solve the nation’s retirement savings gap, but it will be an important stepping stone for encouraging and creating a nation of savers.
As myRA account holders grow their savings, they have the option to transfer [their money] to a private-sector Roth IRA with diverse investment options at any time or once they reach the maximum myRA balance of $15,000.
Workers who have access to a 401(k), however, should typically save with that option first, as many 401(k)s may come with additional benefits like matching contributions.
What kinds of incentives are there for first-time savers who sign up?
Beyond the benefits of the account I’ve already mentioned, there are also some tax incentives and other features savers should know about. myRA is a Roth IRA and follows the same rules that apply generally to Roth IRAs. The earnings grow tax-free and can be withdrawn tax-free once an individual qualifies to take tax-free distributions from the account in retirement or in certain other circumstances.
Additionally, people who contribute to a Roth IRA with a modified adjusted gross income below certain levels may be eligible to claim a Saver’s Tax Credit for their contributions. The amount of the Saver’s Tax Credit can be 50%, 20% or 10% of retirement contributions up to $2,000, depending on income and filing status.
myRA® is a registered trademark of the United States Department of the Treasury.
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