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My, My, MyRA

Last night I was glued to the television set watching MIZZOU men’s basketball beat Arkansas on Bud Walton court for the first time. Then, the State of the Union Address commenced. I “watched” the Republican rebuttal while snuggling with my pillow in bed. One of the items in the speech stood out – the MyRA. The MyRA would be a Roth type savings account offered only by employers and backed by the United States government, where after-tax earnings are deposited into a retirement savings account. Individuals with income under $129,000 and couples with income under $191,000 will qualify to use the MyRA. When the account reaches a $15,000 threshold, it will be rolled into a regular Roth IRA. The President also proposed that a worker would automatically be enrolled in a MyRA by her employer, with the right to opt-out of the program if they so desired.

Why did he suggest that everyone be automatically enrolled in these programs? The answer is simple, inertia (defined: a body tends to want to preserve its present state or a body at rest tends to stay at rest and a body in motion tends to stay in motion).  Once the motion of savings begins, people tend to continue. In my opinion, this idea is quite overdue, as half of all American workers are employed by companies that don’t offer retirement plans, according to the Brookings Institution.  Moreover, for those that do work where retirement plans exist, only about 2/3 of workers save for retirement.  Wait, the picture is bleaker. Twenty-eight percent of workers report less than $1,000 in savings, while more than half have less than $25,000. With these statistics, it is no surprise that there is a growing gulf in wealth in the United States and that the President is worried about the future.

There is much talk about the failure of people to adequately plan for their retirement, by saving sufficient income. As a result we have seen changes in the sources of retirement income over time. Below is a table of the sources of retirement income for those age 65 and over, in both 1974 and 2010.

Source of Income

1974

2010

Percent Change in Percent

Social Security

42.0%

39.5%

-5.95%

Pensions and Annuities

14.0%

19.7%

40.71%

Income from Assets

18.2%

11.8%

-35.16%

Earnings

21.3%

26.9%

26.29%

Other

4.5%

2.1%

-53.33%

What is striking in the above table is the decrease in the importance of income from assets and the increase in the importance of income from earnings from paid work and pensions and annuities (which includes retirement savings plans, many of which did not exist in 1974).  We know from the above that many people don’t have retirement savings or, if they do, they have very little.  Clearly, the low hanging fruit for elderly income is to increase savings to provide income from assets.  It is NOT to depend on more Social Security.

A view of retirement income for the elderly by race is depicted below.  The chart (U.S. Bureau of the Census, 2010) is a little different from the above table, as asset income has been divided into interest and dividends.  Moreover, a person could report more than one source of retirement income.  What do we see?

bar graph

Sources of Family Income of Persons Age 65 and Older by Race/Ethnicity in 2009

It is pretty obvious that White citizens (the darkest bar above) have greater access to the income sources of Social Security, Pensions and Retirement Savings, Interest and Dividends, indicators of greater levels of wealth from past work and savings. On the other hand both Hispanic (lightest bar) and Black households report greater reliance on current earnings and Supplemental Security Income (i.e., welfare) than do White households.

A final picture of retirement income is provided a 2013 poll by the Gallup Annual Economy and Personal Finance survey[1].  By breaking up the sources of retirement income into more distinct categories, they compare all retirees, to those with less than $50,000 in income and those with $50,000 or more in income. Expectedly, Social Security is a major source of retirement income for 73% of those with less than $50,000 in income but is a major source for less than half of those with over $50,000 in income.

“Major” Sources of Income, Current US Retirees

Source of Income All retirees Less than $50,000 $50,000 or more
Social Security 61% 73% 49%
Work pension 36% 27% 55%
401k, IRA, other “self” retirement savings 23% 18% 36%
Home equity 20% 19% 22%
Stock Equity Investments 13% 9% 21%
Other “cash” savings 14% 14% 15%
Annuities or insurance 9% 9% 12%
Part-time work 3% 5% 2%
Inheritance 3% 4% 3%
Rent and Royalties 4% 3% 6%

Notice that stock equity investments are a major source of income for 9% of those with an income of less than $50,000 but for 21% of those with at least $50,000.  Similarly, annuities and insurance are a major source for 12% of the $50,000 and over income group, but only 9% of those with under $50,000. Most disappointing, especially for those that have to work in retirement is the result that 5% of those with less than $50,000 are engaged in part-time work but only 2% of those with income over $50,000. A snapshot to take away is that to have greater income in retirement, one is aided by pensions, self-retirement savings, home equity, stock equity, and insurance products. That is you should take your savings and try to have several income sources, while taking advantage of as many tax-favored products as possible: IRAs, 401ks, housing, annuities, rents and royalties.

The point to this discussion is simple. Start today to save for your retirement.

To help motivate you to begin saving, the table on the following page is powerful. The table shows five different investing scenarios.  Scenario 4 depicts the traditional IRA account, i.e., a person starts investing $5,500 per year (the 2014 maximum) at age 35. As can been seen, you are much better off investing sooner, rather than later—regardless of whether it is a tax-deferred account or a regular, taxable investment account.  Investing $275 per year (as shown in Scenario 3) up through age 34 followed by the traditional $5,500 per year makes a tremendous difference.  Despite investing only an extra $8,250, the future value in Scenario 3 is over four times the future value in Scenario 4.  Very few of us can save $5,500 when we are 5 thru 9 years of age, as shown in Scenario 5.  Here, the future value is the greatest of the five scenarios, $4,335,932, confirming the fact of the importance of beginning to save early, as well as helping us understand why the wealthy continue be wealthy and why it is important to be happy.  Benjamin Franklin said, “Content makes poor men rich.  Discontent makes rich men poor.”  So, save your Ben Franklins ($100 bills) and make your life a financial success, while preparing for the success of those who follow.

Future Value of Various Investing Strategies
(Assuming a 10% annual return and not adjusted for taxes or inflation)

Age Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Annual Investment Annual Investment Annual Investment Annual Investment Annual Investment
5 $275 $2750 $275 $0 $5500
6 $275 $0 $275 $0 $5500
7 $275 $0 $275 $0 $5500
8 $275 $0 $275 $0 $5500
9 $275 $0 $275 $0 $5500
10 $275 $0 $275 $0 $0
11 $275 $0 $275 $0 $0
12 $275 $0 $275 $0 $0
13 $275 $0 $275 $0 $0
14 $275 $0 $275 $0 $0
15 $275 $0 $275 $0 $0
16 $275 $0 $275 $0 $0
17 $275 $0 $275 $0 $0
18 $275 $0 $275 $0 $0
19 $275 $0 $275 $0 $0
20 $275 $0 $275 $0 $0
21 $275 $0 $275 $0 $0
22 $275 $0 $275 $0 $0
23 $275 $0 $275 $0 $0
24 $275 $0 $275 $0 $0
25 $275 $0 $275 $0 $0
26 $275 $0 $275 $0 $0
27 $275 $0 $275 $0 $0
28 $275 $0 $275 $0 $0
29 $275 $0 $275 $0 $0
30 $275 $0 $275 $0 $0
31 $275 $0 $275 $0 $0
32 $275 $0 $275 $0 $0
33 $275 $0 $275 $0 $0
34 $275 $0 $275 $0 $0
35 $275 $0 $5500 $5500 $0
36 $275 $0 $5500 $5500 $0
37 $275 $0 $5500 $5500 $0
38 $275 $0 $5500 $5500 $0
39 $275 $0 $5500 $5500 $0
40 $275 $0 $5500 $5500 $0
41 $275 $0 $5500 $5500 $0
42 $275 $0 $5500 $5500 $0
43 $275 $0 $5500 $5500 $0
44 $275 $0 $5500 $5500 $0
45 $275 $0 $5500 $5500 $0
46 $275 $0 $5500 $5500 $0
47 $275 $0 $5500 $5500 $0
48 $275 $0 $5500 $5500 $0
49 $275 $0 $5500 $5500 $0
50 $275 $0 $5500 $5500 $0
51 $275 $0 $5500 $5500 $0
52 $275 $0 $5500 $5500 $0
53 $275 $0 $5500 $5500 $0
54 $275 $0 $5500 $5500 $0
55 $275 $0 $5500 $5500 $0
56 $275 $0 $5500 $5500 $0
57 $275 $0 $5500 $5500 $0
58 $275 $0 $5500 $5500 $0
59 $275 $0 $5500 $5500 $0
60 $275 $0 $5500 $5500 $0
Total Invested $15,400 $2,750 $146,025 $137,500 $27,500
FV at age 60 $569,154 $571,904 $1,083,017 $254,909 $4,335,932

Postscript: When Benjamin Franklin died in 1790, he had a codicil in his will where he left $4,400 to Boston, Massachusetts and Philadelphia, Pennsylvania with the request that the money be loaned to entrepreneurs and the earnings reinvested for 200 years.  Franklin projected the account to be worth $35 million in 1991.  Although the funds were mismanaged by the city fathers, the corpus was $6.5 million in 1991.  The lesson: Frugality overcomes mismanagement.

[1] http://www.gallup.com/poll/162713/pensions-top-income-source-wealthier-retirees.aspx?version=print