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“I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in."
I'm all for discussing the Automatic IRA idea, but what the hell is a riskless investment, and can it possibly give you a return beyond inflation?
Reply to @mrdarcey: Without getting academic about what is "riskless" and taking its colloquial meaning, TIPS held to maturity is a form of riskless investment that can provide growth with inflation protection. With a tax-deferred retirement account that reinvests, it can provide some compounded growth over time. There are no details yet on whether these are a new kind of bonds as a special type of treasuries or a special type of IRA that holds existing treasuries.
Of course, the evaluation of this will be colored by one's political ideology with unreasonable expectations to the extreme. It won't be a substitute for anything that exists. It won't be the only thing someone needs but it will be discussed that way I am sure to score political points on either side to praise it or diss it.
If the basic idea is growth for lower income earners to supplement Social Security, are TIPS the the best way to go? As Bogle points out, SS essentially is a long term bond program with inflation adjustment built in. Would you not want to diversify?
My understanding was two separate proposals: One the new bond program. The second is a sort of Automatic IRA for people without an employer-based retirement option. I'd be all for the second given the rates at which people save and the research suggesting automatic enrollments up that. But it doesn't change people not having enough to begin with. And if the plan only gives you access to long-term bonds, I'm not sure that provides enough flexibility. Of course, I'm just speculating out loud, and look forward to seeing the actual proposals. Even if the political rhetoric is as asinine as usual.
I'm highly skeptical of the proposal - sketchy as it is. (1) Why push people into bonds at a time of historically low rates? (2) If program is to be voluntary, what makes them think Joe Investor will buy in? He hasn't owned up to his responsibilities in other voluntary contribution plans. This new one kinda sounds like switching a drunk from bourbon to gin, hoping it will sober him up. (3) If the program is to be mandatory, than this sounds more like an attempt to supplant Social Security in much the same way employers have used defined contribution plans to supplant defined benefit plans for their workers.
These are just feel good proposals by 0bama. Workers who do not have a employer based retirement program already have access to a automatic IRA as it is. Any mutual fund company will open the IRA for you and automatically take the money from your bank account each month. To paraphrase Hank's comment, you can lead the horse to the water but you cannot force it to drink.
I didn't watch the SOTU. I had better things to do.
Like I said, this will be discussed pretty much aligned with political ideologies.
If I were to design this from a financial perspective rather than political perspective somewhat like trying to solve the obesity problem a small step at a time, this would be for a specific segment of the population, definitely not for anybody who might visit this forums. Wouldn't solve everybody's problem but help more than a few get in the habit of saving and perhaps transmit that to their children and so on. Not a universal program and no expectation of that.
From a product design perspective, it would need to be super simple to participate in and it wouldn't require ANY investment skills whatsoever to participate or burn oneself in. So no flexibility. The people who need investment flexibility wouldn't be the target audience for this and would have existing options.
The instrument would be something like the guaranteed interest "fund" that used to exist in old 401ks that would preserve capital and compound interest over time. The interest rate would be adjusted every quarter tied to market rate and be backed by treasuries. It would be entirely voluntary and so initially would only catch those that would save if the process was simple and don't want to participate in anything that would lose money as happened in a lot of 401ks. There would be a way for employers to withhold pre-tax and remit this just as they do the SS taxes without having a 401k plan in the company. That would make the tax filing simple.
It would exist in parallel with SS, IRAs, 401ks etc, just as Roth IRAs co-exist for a specific target segment without trying to be everything for everybody.
But then I didn't design the above as a politician so who knows what the product will actually be.
Meanwhile, we can put up strawmen designs and shoot it down as the national sport.
Reply to @cman: I agree. It could be something like a stable fund that exists in many 401 plans - guaranteed interest (adjusted over time). It will pay more than money market and will be risk free.
Reply to @cman: I have brought up this idea before in other venues and it either gets likes or gets shot down.
Take the 12.5% SS deduction. 10% would go into your own private retirement account that would be portable wherever you go. It would have your own name on it so the money would belong to your heirs on your passing. You could invest the money in approved funds. No trading on this account. For those who do not understand investing, there are all in one funds that fit most everyone. A conservative fund of funds would be good in this case.
As for the remaining 2.5%, that would go into a national pool to help those in retirement who are disabled or unable to work.
People would still be able to avail of additional plans if their employers offer them or if they wish to open personal IRA's etc.
In essence, nothing would change from the workers viewpoint except that instead of a SS account, the money deducted from paychecks would be going into their own account that they cannot touch according to SS rules.
There is no such thing as a riskless investment with a decent return AT THIS TIME. As interest rates move higher, that will likely change. But the definition of decent return is often a moving target and certainly subject to debate. Perhaps a better option is for ALL employers to offer a retirement plan of some kind and have a mandatory participation requirement. There could be a fall-back investment option of some kind, that most likely would do a heck of a lot better than the Obama Bond over a person's working life. And why do we have to inject more federal government into the retirement picture?
As for Social Security, the average life expectancy when SS began was 58. Now it is 76, but the retirement age has never been adjusted. How crazy is this? Not enough politicians have the guts to agree to an easy fix. Raise the early retirement age from 63 to 65, raise the full benefit age from 65 to 70. If that does not handle it all, either increase the SS tax for high earners or consider some kind of means testing. And perhaps find a way to rein in the SS disability benefit fiscal cliff.
As for TIPS, I would certainly not use a TIPS fund. I might consider buying new TIPS directly from the Treasury. But TIPS funds have been poor options of late. When you consider the ETF TIP has a 10-year average return of only 4.8 before inflation, just think what might happen to already bid-up bonds over a long time period. How much higher will values actually go when the current yield is a negative 2%? Stick with individual bonds here, and avoid mutual funds and ETFs when it comes to TIPS. PIMCO should have learned this lesson, since their TIPS-linked derivative strategy add-on to many of their funds certainly backfired in 2013.
As for Stable Value funds, remember they are only as good as the financial strength of the underlying insurance companies. And there is a reason very few corporate plans offer them any more...not enough companies are willing to guarantee the higher-than-average yields.
Personally, I agree with johnchisum, but allowing some self-directed SS contributions is such a polarizing idea that it will probably never happen.
I don't see how the new MyIRA can hurt particularly if it's something like cman suggested. However, some observations that need to be made. First, the vast majority of the target audience of this new retirement savings account cannot afford to save anything at all. Second, to ask people to save more at this time is counterproductive to solving our greatest macroeconomic problem - lack of aggregate demand. Third, for any conspiracy theorists, this would be a very nice way to them to confiscate our savings as it would require that you buy gov't bonds (perhaps instead of the Fed if they're still trying to reduce the taper [HTF do you reduce a taper?!?]).
Nopers, what we need is an increase in the minimum wager across the board. The argument that it increases unemployment has never been proven in studies. Are their individual cases? Sure. However, most of the additional cost can and will be passed along in higher prices. Where the real benefit comes from is the increase in aggregate demand. Anyone that goes from $7 to $10 is going to spend every dollar buying stuff. At their income level, their Marginal Propensity to Consume is as close to 1.0 as possible. They're going to buy stuff and if people buy stuff, companies have to make stuff.
I talked about this when Shrub has his tax cuts - most of which I endorsed - that there was insufficient kickback at the bottom of the ladder. It doesn't matter if the price of money is about zero and they make CapExp taxes nonexistent, you are not going to build another plant or add another shift, if you are operating at 75% of capacity.
We've add how many wasted years under Supply Side trickle down economic that that myth is exposed as the rubbish it is. Might there exist a time in the economic cycle where the supply side needs to be gooses? Sure. However, if you ignore the Demand Side, there will be insufficient aggregate demand to support economic growth.
Raising the minimum wage is pure demand side economic stimulus AND doesn't cost us any tax dollars.
The Reuters link Ted provided basically makes it sound like a high yield savings account, based on the TSP, that can be later converted into a Roth. If that rollover can happen at anytime, these may be useful. If only after retirement, then I fail to see the point. Since 401(k)s and other employer sponsored programs offer equity holdings the yield offered off this account can never close that gap.
I'm glad there is a proposal trying to address retirement savings, but we keep hearing the basic problem is growing inequality based on increasing wage disparity. I fail to see how encouraging people of lower income to use fancy savings accounts doesn't just repeat the same problem. I'd personally like to see more encouragement to use the Roth program. But I'm also assuming some financial literacy that might not exist. And as rono points out below, if you can't afford to save in the first place, there are bigger problems.
Another thought to throw in here. The idea of raising the retirement age because we are all living longer is not something everyone agrees with. After working for almost 40 years, I was very happy to leave the work force at a early age. It was due to my diligent saving for retirement that made it possible. There is a benefit for some to retire and enjoy life doing things you could not do during your work years. While there are those who enjoy their work and will stick with it late into their lives, there is also the other side that looks forward to travel and perhaps doing something different. Each time we move the retirement age up, we make it harder for those who do want to take it easier in their latter stage of life.
This is not something that can be forced on anyone. But it should not be taken away from those who want to get away from the rat race when they can.
Reply to @mrdarcey: It looks like a Roth IRA with just one fund choice at the beginning. Contributions not pre-tax so no implications on taxation. After reaching $15k, it will HAVE to be rolled into a regular ROTH IRA so you can knock yourself out with all kinds of investment choices then if you want to. They probably would not allow rollovers before then to reduce liquidity needs that reduce what interest rates can be guaranteed.
Guaranteeing rates is not a problem because it is backed by Treasuries held to maturity which don't have to be sold with principle losses and there are no actuarial risks. US Govt is the insurer in this case and so it is as riskles as Treasuries held to maturity.
I think it is a good step for encouraging savings in small steps just like you approach obesity one person and one pound at a time. When initial adopters learn the power of compounding, it will likely increase participation as word spreads.
Not a solution for world peace or a way to address inequality, or an alternative to privatizing/dismantling social security etc., or whatever one's pet ideological idea is. It is just a small step to encourage savings by providing a very low friction route. Much lower than having to go set up a Roth IRA and be subjected to all kinds of fees and broker greed.
The kind of small step that is actually doable than the grandiose ideological plans but like anything will be heavily politicized for talking points. If only Washington got into the habit of doing things one small step at a time like this, we would make much more progress.
Also,some Advisers comment on latest talking point;Income Inequality and other challenges facing investors in general.
As C. Carter Boucher, founder of Boucher Capital Management in Anderson, S.C., put it during our phone conversation: “I used to have middle-income clients come to me at retirement with a quarter or half million dollars, now coming with $50,000 to $100,000. People talk about the divide in income, but that's understated; it's really about shrinking benefits: 401(k) matches, profit sharing, pensions." http://www.investmentnews.com/article/20140127/BLOG03/140129917?template=printart
Comments
Of course, the evaluation of this will be colored by one's political ideology with unreasonable expectations to the extreme. It won't be a substitute for anything that exists. It won't be the only thing someone needs but it will be discussed that way I am sure to score political points on either side to praise it or diss it.
If the basic idea is growth for lower income earners to supplement Social Security, are TIPS the the best way to go? As Bogle points out, SS essentially is a long term bond program with inflation adjustment built in. Would you not want to diversify?
My understanding was two separate proposals: One the new bond program. The second is a sort of Automatic IRA for people without an employer-based retirement option. I'd be all for the second given the rates at which people save and the research suggesting automatic enrollments up that. But it doesn't change people not having enough to begin with. And if the plan only gives you access to long-term bonds, I'm not sure that provides enough flexibility. Of course, I'm just speculating out loud, and look forward to seeing the actual proposals. Even if the political rhetoric is as asinine as usual.
edited for clarity.
I didn't watch the SOTU. I had better things to do.
If I were to design this from a financial perspective rather than political perspective somewhat like trying to solve the obesity problem a small step at a time, this would be for a specific segment of the population, definitely not for anybody who might visit this forums. Wouldn't solve everybody's problem but help more than a few get in the habit of saving and perhaps transmit that to their children and so on. Not a universal program and no expectation of that.
From a product design perspective, it would need to be super simple to participate in and it wouldn't require ANY investment skills whatsoever to participate or burn oneself in. So no flexibility. The people who need investment flexibility wouldn't be the target audience for this and would have existing options.
The instrument would be something like the guaranteed interest "fund" that used to exist in old 401ks that would preserve capital and compound interest over time. The interest rate would be adjusted every quarter tied to market rate and be backed by treasuries. It would be entirely voluntary and so initially would only catch those that would save if the process was simple and don't want to participate in anything that would lose money as happened in a lot of 401ks. There would be a way for employers to withhold pre-tax and remit this just as they do the SS taxes without having a 401k plan in the company. That would make the tax filing simple.
It would exist in parallel with SS, IRAs, 401ks etc, just as Roth IRAs co-exist for a specific target segment without trying to be everything for everybody.
But then I didn't design the above as a politician so who knows what the product will actually be.
Meanwhile, we can put up strawmen designs and shoot it down as the national sport.
Take the 12.5% SS deduction. 10% would go into your own private retirement account that would be portable wherever you go. It would have your own name on it so the money would belong to your heirs on your passing. You could invest the money in approved funds. No trading on this account. For those who do not understand investing, there are all in one funds that fit most everyone. A conservative fund of funds would be good in this case.
As for the remaining 2.5%, that would go into a national pool to help those in retirement who are disabled or unable to work.
People would still be able to avail of additional plans if their employers offer them or if they wish to open personal IRA's etc.
In essence, nothing would change from the workers viewpoint except that instead of a SS account, the money deducted from paychecks would be going into their own account that they cannot touch according to SS rules.
Just a thought.
Regards,
Ted
http://www.reuters.com/assets/print?aid=USBREA0S0Q020140129
As for Social Security, the average life expectancy when SS began was 58. Now it is 76, but the retirement age has never been adjusted. How crazy is this? Not enough politicians have the guts to agree to an easy fix. Raise the early retirement age from 63 to 65, raise the full benefit age from 65 to 70. If that does not handle it all, either increase the SS tax for high earners or consider some kind of means testing. And perhaps find a way to rein in the SS disability benefit fiscal cliff.
As for TIPS, I would certainly not use a TIPS fund. I might consider buying new TIPS directly from the Treasury. But TIPS funds have been poor options of late. When you consider the ETF TIP has a 10-year average return of only 4.8 before inflation, just think what might happen to already bid-up bonds over a long time period. How much higher will values actually go when the current yield is a negative 2%? Stick with individual bonds here, and avoid mutual funds and ETFs when it comes to TIPS. PIMCO should have learned this lesson, since their TIPS-linked derivative strategy add-on to many of their funds certainly backfired in 2013.
As for Stable Value funds, remember they are only as good as the financial strength of the underlying insurance companies. And there is a reason very few corporate plans offer them any more...not enough companies are willing to guarantee the higher-than-average yields.
Personally, I agree with johnchisum, but allowing some self-directed SS contributions is such a polarizing idea that it will probably never happen.
I don't see how the new MyIRA can hurt particularly if it's something like cman suggested. However, some observations that need to be made. First, the vast majority of the target audience of this new retirement savings account cannot afford to save anything at all. Second, to ask people to save more at this time is counterproductive to solving our greatest macroeconomic problem - lack of aggregate demand. Third, for any conspiracy theorists, this would be a very nice way to them to confiscate our savings as it would require that you buy gov't bonds (perhaps instead of the Fed if they're still trying to reduce the taper [HTF do you reduce a taper?!?]).
Nopers, what we need is an increase in the minimum wager across the board. The argument that it increases unemployment has never been proven in studies. Are their individual cases? Sure. However, most of the additional cost can and will be passed along in higher prices. Where the real benefit comes from is the increase in aggregate demand. Anyone that goes from $7 to $10 is going to spend every dollar buying stuff. At their income level, their Marginal Propensity to Consume is as close to 1.0 as possible. They're going to buy stuff and if people buy stuff, companies have to make stuff.
I talked about this when Shrub has his tax cuts - most of which I endorsed - that there was insufficient kickback at the bottom of the ladder. It doesn't matter if the price of money is about zero and they make CapExp taxes nonexistent, you are not going to build another plant or add another shift, if you are operating at 75% of capacity.
We've add how many wasted years under Supply Side trickle down economic that that myth is exposed as the rubbish it is. Might there exist a time in the economic cycle where the supply side needs to be gooses? Sure. However, if you ignore the Demand Side, there will be insufficient aggregate demand to support economic growth.
Raising the minimum wage is pure demand side economic stimulus AND doesn't cost us any tax dollars.
peace,
rono
The Reuters link Ted provided basically makes it sound like a high yield savings account, based on the TSP, that can be later converted into a Roth. If that rollover can happen at anytime, these may be useful. If only after retirement, then I fail to see the point. Since 401(k)s and other employer sponsored programs offer equity holdings the yield offered off this account can never close that gap.
I'm glad there is a proposal trying to address retirement savings, but we keep hearing the basic problem is growing inequality based on increasing wage disparity. I fail to see how encouraging people of lower income to use fancy savings accounts doesn't just repeat the same problem. I'd personally like to see more encouragement to use the Roth program. But I'm also assuming some financial literacy that might not exist. And as rono points out below, if you can't afford to save in the first place, there are bigger problems.
This is not something that can be forced on anyone. But it should not be taken away from those who want to get away from the rat race when they can.
http://www.zerohedge.com/news/2014-01-29/market-idiocy-full-frontal-round-three
Regards,
Ted
Guaranteeing rates is not a problem because it is backed by Treasuries held to maturity which don't have to be sold with principle losses and there are no actuarial risks. US Govt is the insurer in this case and so it is as riskles as Treasuries held to maturity.
I think it is a good step for encouraging savings in small steps just like you approach obesity one person and one pound at a time. When initial adopters learn the power of compounding, it will likely increase participation as word spreads.
Not a solution for world peace or a way to address inequality, or an alternative to privatizing/dismantling social security etc., or whatever one's pet ideological idea is. It is just a small step to encourage savings by providing a very low friction route. Much lower than having to go set up a Roth IRA and be subjected to all kinds of fees and broker greed.
The kind of small step that is actually doable than the grandiose ideological plans but like anything will be heavily politicized for talking points. If only Washington got into the habit of doing things one small step at a time like this, we would make much more progress.
Advisers skeptical of Obama's 'myRA' plan
The voluntary proposal, with no option to invest in stocks, could be doomed to failure. One adviser says the plan "isn't going to go anywhere."
Investment Advisers Skeptical
http://www.investmentnews.com/article/20140129/FREE/140129879?template=printart
Also,some Advisers comment on latest talking point;Income Inequality and other challenges facing investors in general.
As C. Carter Boucher, founder of Boucher Capital Management in Anderson, S.C., put it during our phone conversation: “I used to have middle-income clients come to me at retirement with a quarter or half million dollars, now coming with $50,000 to $100,000. People talk about the divide in income, but that's understated; it's really about shrinking benefits: 401(k) matches, profit sharing, pensions."
http://www.investmentnews.com/article/20140127/BLOG03/140129917?template=printart