Early Retirement Lesson #1: Savings Rate

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I’ve now spent nearly 10 years and 10,000 hours actively reading, thinking, and writing about money and the pursuit of financial freedom. I’ve still got a few years until early retirement but I can finally see the finish line. I’ve been meaning to summarize some of the lessons I’ve learned over time, as I’d like to make something more permanent that I can share with my everyone including my own kids.

In retirement planning, your “number” is usually defined as the amount of money you’ll need to retire. Something like a million dollars, like I used as a goal when starting this blog. Well, I was wrong. Your savings rate is the most important number!

If you take your annual income, your annual spending, and your annual investment returns, most people will admit that they have the most control over the first two. Your income minus your spending equals your savings. Your personal savings rate is thus the percentage of your after-tax income that you can save (and invest) each year:

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I’ll leave the details out, but with some accounting equations and rough assumptions you can determine the number of years until your savings can create enough income to support your expenses.

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Rule of thumb: If you start at zero, you will need a 50% savings rate to retire in 15-20 years. You will need a 30% savings rate to retire within 25-30 years.

I’ve found that the math really does work out this way. You will need to save nearly half your income on a regular basis in order to retire early. Most people will never do this. But it is possible. My net worth was negative $30,000 in 2000. My wife’s was zero. Over the last 10 years, we have saved over 50% of our income every single year except for one year where I quit my job and went back to school. More tips on how it can be done in future posts.

If you want financial freedom, you must calculate and focus on your savings rate.

Early Retirement Portfolio Update – June 2014 Income

There is an ongoing investing debate as to whether you should focus on income or total return. I personally believe that you should focus on total return but realize that income is a critical part of that total return. If you want to live off the income produced by your portfolio, you should make sure it is stable and will grow with inflation. Reaching for yield via riskier stocks or lower-quality bonds is dangerous.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (6/5/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.74% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.48% 0.07%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 3.08% 0.74%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.39% 0.10%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 2.72% 0.16%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 3.25% 0.65%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 1.74% 0.35%
Totals 100% 2.49%

 

As you can see, the overall weighted yield is roughly 2.5%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $25,000 in interest and dividends over the last 12 months. Now, 2.5% is lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. My ideal situation is to get by with just spending this 2.5% in income every year. The paranoid part of me likes the idea of just spending the dividends and interest while not reaching too far for yield. That way, theoretically if I owned say 1% of GE or ExxonMobil, if I never sold shares I’d keep owning 1%.

So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 85% of the way to matching our annual household spending target. Using the 2.5% number, I am only 71% of the way there. We’ll have to see how much full retirement appeals to me once I reach my goal at a 3% withdrawal rate. I’m not opposed to working part-time if the work is interesting to me, so I’m keeping my options open.

Early Retirement Portfolio Update – June 2014 Asset Allocation

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I want to get back to doing quarterly updates to our investment portfolio, which includes both tax-deferred accounts like 401(k)s and taxable brokerage holdings. Other stuff like cash reserves (emergency fund) are excluded. The purpose of this portfolio is to create enough income on its own to cover all daily expenses well before we hit the standard retirement age.

Target Asset Allocation

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I try to pick asset classes that will provide long-term returns above inflation, regular income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (and if you don’t do that, there’s no point).

Our current ratio is about 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With low expense ratios and low turnover, we minimize our costs in terms of paying fees, commissions, and taxes.

Actual Asset Allocation and Holdings

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Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Stable Value Fund* (2.6% yield, net of fees)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
US Savings Bonds

Changes
I joined the exodus out of PIMCO Total Return fund earlier this year after their recent management shake-up. It actually coincided with my 401(k) allowing a self-directed brokerage “window” with Charles Schwab that allows me to buy Vanguard mutual funds, albeit with a $50 transaction fee. But my 401k assets are finally large enough that the $50 is worth the ongoing lower expense ratios. I’m buying more REITs and TIPS in order to take advantage of this newly-flexible tax-deferred space. I’m still holding onto my stable value fund, but I may sell that position as well in the future.

I think I mentioned this elsewhere, but I am now accounting for my Series I US Savings Bonds as part the TIPS asset class inside my retirement portfolio. Before, they were considered part of my emergency fund. They offer great tax-deferral benefits as I don’t have to pay taxes until they are redeemed. I don’t plan on selling any of them for a long time, at least until my tax rate is much lower in early retirement.

Sustainable Withdrawal Rates from Merrill Lynch Wealth Management

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Here’s another data point in the debate about safe withdrawal rates, or how much money you can safely withdraw from an investment portfolio each year without running out of money. Merrill Lynch Private Banking recently released a whitepaper on “sustainable wealth” aimed at high net worth individuals. Supposedly, in more than 67% of rich families, their wealth fails to outlive the generation following the one that created it, and 90% of the time, assets are exhausted before the end of the third generation.

Rich people problems? Sure, but one of the reasons for this high failure rate is that many people don’t have a reasonable idea of what makes a sustainable spending strategy. This applies to anyone who will eventually draw income from a portfolio for an extended period of time. Making a portfolio last generations is very similar to planning for early retirement. As we are talking about percentages, the numbers apply just as well to smaller portfolios.

Here are the results from a survey of wealthy families ($5M+):

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Here are the safe withdrawal rates they calculated for a 60% stocks, 35% bonds, 5% cash portfolio based on “Merrill Lynch capital market and fee assumptions”.

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I couldn’t find where they state what their confidence level is or what their “fee assumptions” are but I would assume they would at least be in the neighborhood of 1% annually. If you invest in low-cost index funds, that would theoretically mean you could increase the provided withdrawal rates by another 0.8% to 1%.

It looks like 3% is a good number if you want to be safe for 50 years, which is close to my investment horizon. Unfortunately, it is just a matter of luck whether you really need to take things that safely. From this other Merrill Lynch paper, starting with the same portfolio balance you could have taken out 5% a year (67% more income) starting in 1974 and your portfolio would have lasted just as long as if you withdrew only 3% starting in 1972. That is the potential effect of retiring just two years apart.

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If I do use the 3% sustainable withdrawal rate, that works out to putting aside 33 times my annual expenses. To increase flexibility, I also like the idea of making the withdrawal rate somewhat dynamic (adjusts with investment returns) similar to how Vanguard Managed Payout Funds are structured.

Merrill Lynch whitepaper (via BusinessInsider)

Betterment Retirement Income Review – Automated Safe Withdrawal Tool

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bettermentlogoOnline portfolio manager Betterment recently rolled out a new Retirement Income feature that will help you withdraw money from your nest egg. Unfortunately, even though I have a Betterment account I couldn’t test it out directly as it is currently only available to customers with a $100,000+ balance that have designated themselves as retired. But through a combination of reading through their website materials, press releases, blog posts, as well as asking an employee specific questions, I was able to get a good idea of how this feature works.

Factors taken in account. Here’s what they ask about your individual situation:

  • Current portfolio value. You can add outside accounts manually.
  • Asset allocation (Betterment portfolios are built-in).
  • Inflation is assumed to be 3% annually.
  • Time horizon (age and entered longevity).

Dynamic withdrawal strategy. This is very important! Betterment’s calculations assume a dynamic strategy where you come back every year to and reassess to determine a new safe withdrawal amount. Dynamic strategies are more flexible and resilient than static strategies which simply set a number at the beginning of retirement and stick with it regardless of portfolio performance. However, as a result you’ll have to deal with varying income, and it does not appear that they perform income smoothing. Here is an example scenario of how income might fluctuate with (rather optimistic) market performance (source):

betterretire1

If you follow their advice, updating at least annually, Betterment estimates that there is a 1% or less chance of depleting your portfolio before the end of your designated time horizon. As with many similar calculators in the industry, their numbers are based on Monte Carlo simulations.

Sample numbers for 65-year old retiree. I asked Betterment Marketing Manager Katherine Buck about the following hypothetical situation: $1,000,000 portfolio, 60% stocks and 40% bonds invested at Betterment, with 30-year time horizon (age 65 to 95). In that case, the current model income recommendation would be $2,879 per month ($34,548 a year), or roughly 3.45% of the $1M portfolio.

Automatic withdrawals. To recreate a paycheck in retirement, you can set up an auto-withdrawal to deposit money into your linked bank account on a regular basis. You can go with their recommended amount, or you can adjust the amount as you wish.

Cost. The Retirement Income feature is included in their existing fee structure. At a $100,000 minimum balance, a Betterment charges 0.15% annually and that fee is inclusive of all trading costs and rebalancing costs. 0.15% works out to $150 a year per $100,000 invested. So a $1,000,000 portfolio would cost $1,500 a year. This is much cheaper than a traditional advisor from a major brokerage firm.

Finally, here’s a video about the feature that includes some (blurry) screenshots of the tool in action:

Overall, I think this is a smart move on Betterment’s part to start offering more features that a human financial advisor would offer that a discount brokerage like TD Ameritrade wouldn’t. The numbers appear to be reasonably conservative and the tool is definitely easy to use. A competing product that I’ve also written about is the Vanguard Managed Payout fund. In comparison with that product, I wonder if Betterment shouldn’t add a smoothing component to their recommended income amounts so that the withdrawal amounts don’t swing too wildly from year-to-year. Betterment has historically shown a good willingness to make changes in response to feedback, so I am hopeful they will consider it.

Also see my previous full Betterment review. The current Betterment sign-up promotion offers 3 months free with a $5,000 initial deposit, 4 months free with a $25,000 deposit, and 6 months free with a $100,000 initial deposit.

Retirement Portfolio Spending Strategy – Withdrawal Order Flowchart

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According to research from the Vanguard Group, another area where a skilled financial advisor is supposed to able to add value is helping retirees manage withdrawals from their portfolios in order to minimize taxes. According to their paper:

Advisors who implement informed withdrawal-order strategies can minimize the total taxes paid over the course of their clients’ retirement, thereby increasing their clients’ wealth and the longevity of their portfolios. This process alone could represent the entire value proposition for the fee-based advisor.

The paper goes on to show how correct ordering can improve returns by up to 0.70% annually versus people with multiple different account types withdrawing in the wrong order. The thing is, ordering your withdrawals properly isn’t all that complicated. Most of it is summarized in this flowchart:

portspend

  • RMDs stand for required minimum distributions. In general, these are forced withdrawals from pre-tax “traditional” IRAs (including SEP and SIMPLE IRAs) and pre-tax workplace defined-contribution plans (including 401(k) and 403(b) plans) once you reach age 70.5. Since it is mandatory and taxed at ordinary income rates, you may as well spend them first.
  • Next, taxable flows include things like interest, dividends, and capital gains distributions that are already being “spun off” from your taxable portfolio. These are also going to be taxed no matter what anyway.
  • Next, spend your taxable portfolio itself by selling shares and paying any capital gains taxes that may be due. Sell investments with the lowest gains first to minimize taxes. Don’t sell if you don’t need the money.
  • What you have left are tax-deferred or tax-free (Roth) accounts. Do you want to pay taxes now, or later? If you think your marginal tax bracket will be higher in the future, then you should pay taxes now (withdraw first from tax-deferred account). If you think your marginal tax bracket will be lower in the future, then you should pay taxes later (withdraw first from Roth accounts). You could make your decision differently each year depending on your current situation.

Vanguard Managed Payout Funds and Safe Withdrawal Rate Strategy

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paycheckreplaceA key component of retirement planning is figuring out how to draw an income from all that money you’ve invested. “Create your own paycheck.” The trick is figuring out how to take a stable amount out every year without running out of money.

This has led to a debate about “safe withdrawal rates”. The 4% number has been thrown around a lot, where for example if you retired with $1,000,000 in a balanced portfolio of stocks and bonds you might take out $40,000 a year (increasing with inflation) for 30 years with confidence. The problem is that if you simply take out 4% of your starting balance and then keep taking that number out every year robotically then your outcome depends a lot on sequence of returns. If you hit a prolonged bear market just a couple years into retirement (i.e. value drops to $700,000), your nest egg is much less likely to survive. On the other hand, if you hit a bull market for the first 10-15 years and only experience the bear market afterward, then you may die with more money than you started with.

This is why many experts encourage a more flexible “dynamic” withdrawal strategy that adjusts withdrawals based on portfolio performance. There are an infinite number of ways to implement this, so I looked for an industry example and found it in the Vanguard Managed Payout Fund (VPGDX)*. This all-in-one fund uses a 4% target distribution rate and with regular, monthly distributions that you can indeed treat like a (somewhat variable) paycheck. The fund is actively managed for total return, although a majority of its components are passive index funds.

How does the Vanguard Managed Payout fund calculate how much you can spend each year? Reading through the prospectus, we find that the monthly payout is calculated on January 1st every year, then kept constant for the next 12 months, and then reset again the next January 1st. If you started January 1st, 2014 with a $1,000,000 in this fund you would get a payout every month of 2014 for $2,995 ($35,940 a year). Why isn’t it 4% or $40,000?

The fund’s dynamic spending approach uses a “smoothing” method that keeps the monthly payout from changing too dramatically from year to year. Specifically, the 4% withdrawal rate is based on a 3-year rolling average of hypothetical past account value (assumes you spend the monthly distributions, but reinvest any year-end capital gains and dividends). Screenshot from prospectus:

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So since the average of the past 3 years is lower than the current value, you’re getting 4% of a smaller number. As you can see, with smoothing your annual income from this fund can vary significantly over time. A starting portfolio size of $1,000,000 might get you an annual distribution varying from less than $36,000 or more than $44,000. Other smoothing methods include setting a maximum ceiling or minimum floor value, but this fund does not do that. Ideally, you would use the income from this fund to supplement other income from more reliable sources like Social Security, pensions, or guaranteed income annuities. That way your overall income will vary even less, and you’ll only have to cut back a little during down years.

(* Previously, Vanguard had three different Managed Payout funds with three different target spending rates of 3%, 5%, and 7%. I think this was confusing for many investors who didn’t really understand that the 7% fund would most likely experience a significant loss of principal over time. This is only speculation on my part, but the 7% payout fund did gather 8 times the assets as the 3% payout fund, even though 3% is a more realistic number for most folks. Vanguard now says that 4% is best for the “typical retirement period of 20–30 years”.)

Free Starter Personal Finance Book: How Millennials Can Get Rich Slowly

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ifyoucanbookWilliam Bernstein, author of several books on investing, has recently released a short book targeted at giving young folks a primer on saving for retirement. The title is If You Can: How Millennials Can Get Rich Slowly (Amazon link for the reviews). It costs the minimum 99 cents there, but you can also download it for free in PDF, MOBI ebook, and Amazon AZW3 formats. From his website:

For years I’ve thought about an eleemosynary project to help today’s young people invest for retirement because, frankly, there’s still hope for them, unlike for most of their Boomer parents. All they’ll have to do is to put away about 20% of their salaries into a low-cost target fund or a simple three-fund index allocation for 30 to 40 years. Which is pretty much the same as saying that if someone exercises and eats a lot less, he’ll lose 30 pounds. Simple, but not easy.

Not easy because unless the millennials learn a small amount about finance, they’ll fall victim to the Five Horsemen of Personal Finance Apocalypse: failure to save, ignorance of financial theory, unawareness of financial history, dysfunctional psychology, and the rapacity of the investment industry.

The book is only 27 pages long, but there are also several “reading assignments” of other books to complete your education. Those other books are not free but they have all been around long enough that it shouldn’t be too difficult to borrow a copy from your local library.

How To Never Retire: Cash Out Your 401(k) When Leaving a Job

I mentioned Charlie Munger and his principle of inversion in a recent book review. Sometimes the best solution to a problem comes by approaching it backwards. You can learn more about it by reading the transcript from Mungers’ 2007 USC Law School Commencement speech. An excerpt:

Let me use a little inversion now. What will really fail in life? What do you want to avoid? Such an easy answer: sloth and unreliability. If you’re unreliable it doesn’t matter what your virtues are. Doing what you have faithfully engaged to do should be an automatic part of your conduct. You want to avoid sloth and unreliability.

What can you do to never retire? The broad answer is to never put anything aside for later. A specific answer is to cash out your retirement plan whenever you get the opportunity (i.e. when you leave a job).

Seems simple, right? But according to 401k behemoth Fidelity Investments, more than one third of all participants (35%) cashed out their 401(k) balances when leaving their job in 2013 (source). Among workers aged 20 to 39, a whopping 41% cashed out their 401(k) balances!

Cashing out before age 59.5 means you owe income taxes on the entire withdrawal amount immediately plus an additional 10% penalty. You only get allotted a certain amount of contributions to a tax-advantaged account each year, so that’s even more potential money washed down the drain.

I repeat, the most important thing to do is not cash out your 401(k). What you actually do with it instead is also worth some discussion:

  1. Roll it over into an IRA. I would say for most people, it is best to roll it over to an IRA at your own custodian. Brokerages like Vanguard, Fidelity, TD Ameritrade, and Schwab all have IRAs that feature low-cost ETFs and numerous other options (Barron’s broker rankings). They all want your money desperately, so if you have any problems at all, just call them up and ask for some help. My mom recently moved her 401k into a IRA at Vanguard and the Vanguard phone rep helped her through everything step-by-step.
  2. Keep it at your old employer. This may or may not be an option, but if you have a decent plan you could just leave it there for a while. Leaving assets in a 401(k) may allow you do contribute to a “Backdoor” Roth IRA for those people with high incomes.
  3. Move it to your new employer. It is harder to think of a compelling reason to do this these days. It used to be that some plans offered cheap institutional shares but now most ETFs already offer rock-bottom expense ratio. But again, you may want your assets to stay in a 401(k) and not an IRA for Pre-Tax IRA to Roth IRA conversion purposes.

The Power of Compound Interest Shown in a Single Chart

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It’s not just how much you save, it’s when you save that matters. The best time to start is now. This is the power of compounding returns, which this single chart will help you visualize:

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  • Susan (grey) invests $5,000 per year from age 25 to 35 ($50,000 over 10 years) and stops.
  • Bill (green) invests $5,000 per year from ages 35 to 65 ($150,000 over 30 years).
  • Chris (blue) invests $5,000 per year from ages 25 to 65 ($200,000 over 40 years).

You’ll note that Susan still ends up with more money than Bill, even though he invests three times as much money over 30 years, all because Bill starts late. Susan and Chris start out the same, except that Susan stops after 10 years while Chris keeps going. Chris only invests $100,000 more than Susan, but ends up with $500,000 more money in the end. A 7% annual return is assumed.

The chart is from a JP Morgan slide deck for their asset managers, via Business Insider.

I’m also reminded of Warren Buffett and his Snowball biography – “Life is like a snowball. The important thing is finding wet snow and a really long hill.”

Can I Really Withdraw My Roth IRA Contributions At Any Time Without Tax Or Penalty?

Revised for 2014. This post about how to withdraw past Roth IRA contributions has been popular over the years amongst search visitors, and I have completely updated it using the most recent IRS documentation. Besides emergencies, this information may also be useful for early retirees under age 59.5 that wish to access some of their tax-deferred funds without incurring taxes or penalties.

This is a follow-up to my post Roth IRA Contribution vs. Emergency Fund Savings, where I suggested that people should just fund their Roth IRAs first over an Emergency Fund. The simple reasoning was that anyone can withdraw their Roth IRA contributions at any time, without penalty. (Not earnings, just contributions.) Put in $5,000, and you can take out $5,000 later – be it one day later, one week later, or one decade later. But some concerns were raised about the validity of that assumption, so I wanted to iron that out here using IRS Publication 590.

First, we head to the Roth IRA section, specifically the subsection called Are Distributions Taxable?. Here, the first sentence states:

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)

Sounds pretty clear, but let’s keep looking. The next section talks about qualified distributions, like those made after you turn 59½, which are definitely not taxable. We are given this decision flowchart (Figure 2-1), and… whoops, we may not even pass the first box. Taking out your contribution within the first 5 years is not a qualified withdrawal. 

But wait. Not all unqualified withdrawals are taxable. Going to How Do You Figure the Taxable Part?, we are directed as follows:

To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III.

Here is a link to Form 8606 [pdf] and the Form 8606 instructions [pdf].

Here’s how you would fill out the form for the simple situation of taking out former Roth IRA contributions. On Part III, Line 19, you would include the money you took out as a distribution – “Enter your total nonqualified distributions from Roth IRAs in 2013″. This would carry over to line 21. But then on Line 22 you would “Enter your basis in Roth IRA contributions”. Line 23 tells you to subtract the difference (21 minus 22). If you are taking out less than you formerly contributed over the years, your net taxable amount would be zero.

What about a possible 10% penalty? In the section on the penalties Additional Tax on Early Distributions, we see this:

Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Since this unqualified distribution of a former contribution is not taxable, there is no “taxable part” and thus no penalty to worry about.

In conclusion, although taking out a former Roth IRA contribution as a distribution may be (1) an unqualified distribution, it is also (2) not taxable and (3) not subject to any additional penalties. When subsequently filing your taxes, remember to fill out IRS Form 8606 as indicated above so show the IRS that you are only taking out your original basis.

How Do I Make A Withdrawal?
If you are under 59½, you usually need to make a specific request to your broker. Here is the info from my Vanguard account:

You can request a withdrawal from your IRA online, over the phone, or by mail. You can have a check sent to you, have the proceeds deposited directly to your bank account, or transferred to a nonretirement Vanguard account.

New myRA Retirement Accounts Quick Summary

Now that the dust has settled a bit, here’s a quick breakdown of the newly-announced myRA based on the description “simple, safe and affordable starter retirement savings account”.

  • Simple = Direct payroll deduction. myRA will be funded directly through paycheck withholding, likely using the same infrastructure used to buy savings bonds via TreasuryDirect. No employee match. No bank account required. One investment option.
  • Safe = Government-backed principal protection. The only thing you can buy in the myRA is a security identical to the G Fund of the Thrift Savings Plan available to federal employees. First, it has a principal guarantee so that your balance will never go down. Second, it pays interest based on the weighted average of all treasuries with maturities 4 years or more (2.5% as of January 2014). So it has the higher interest you’d get from owning longer-term bonds without the risk of loss.
  • Affordable = Low contribution requirements. Minimums of $25 needed to start, and $5 per paycheck for future contributions.
  • Starter = Temporary and small. Must be rolled over to a “regular” Roth IRA held at a private custodian when the account value reaches $15,000 or after 30 years.
  • Retirement account = Structured as a Roth IRA. The myRA is a Roth IRA with the US government as the custodian, as opposed to a private company like TD Ameritrade. Account grows tax-deferred, and qualified withdrawals at retirement are tax-free. Same contribution limits ($5,500 for 2014) and same income limits ($129k MAGI for single, $191k MAGI for couples in 2014).

I would also add that it is not available yet, and will only be coming to select employers in “late 2014″. The goal is to be available to all W-2 employees via payroll deduction eventually, but that is unlikely to be earlier than 2015. For a more in-depth discussion, I liked this article by Michael Kitces at Nerd’s Eye View.

Much like modern car manufacturing, this is an attempt at fashioning a “new” retirement vehicle using existing parts from other models. Why? The President had to piece this thing together using executive order instead of pushing new legislation through Congress.

Will myRA entice people who currently aren’t saving for retirement? I like the ease of paycheck deductions and the idea that you’ll never lose money. But the overall package just isn’t exciting enough. There is no buzz. People are not clamoring to sign up right away. Instead of just 4+ year Treasuries, it should offer both a principal guarantee and the highest interest rate of any US bond (30-year Treasuries?). Make it as attractive as possible.