Consumers in the United States pulled off a neat trick in the fourth quarter. With the weight of the holiday spending season on their shoulders, thick heating bills in their mailboxes, and wages nearly stagnant, U.S. consumers managed to spend money faster than they earned it.
According to the Bureau of Economic Analysis, real disposable personal income — what people have left to spend after taxes and inflation (chained 2009 dollars) — increased at an annual rate of 0.8 percent in the fourth quarter. This is a dramatic deceleration from the 3 percent growth rate recorded in the third quarter and below the 4 percent growth rate recorded in the second quarter. Meanwhile, real personal consumption expenditures increased at an annual rate of 3.3 percent, up from the 2 percent growth rate recorded in the third quarter.
You can probably guess what the net effect of this is. For the same quarter, the BEA reports that personal savings as a percentage of disposable personal income fell 0.6 percentage points to 4.3 percent. At year’s end, total personal savings in the U.S. — disposable income minus outlays — fell 11.8 percent to $545.1 billion as people drew down their savings to cover their holiday and winter expenses.
Now consider this: In 2012, Sen. Tom Harkin (D-Iowa), chairman of the U.S. Senate Committee on Health, Education, Labor & Pensions, released a report called “The Retirement Crisis and a Plan to Solve It,” which put the retirement savings gap at $6.6 trillion. Put simply, Americans are not saving nearly enough money and are woefully unprepared for retirement. According to Harkin’s report, half of Americans have less than $10,000 in savings.
Concern for America’s brewing retirement crisis, as Harkin has framed it, has percolated through Congress — which has been unable to do anything about it — and to the White House. Apparently eager to get something done despite the political blockades that have been set up throughout the legislative pipeline, President Barack Obama announced in his State of the Union address that he would direct the Treasury to create a new retirement savings vehicle for lower-income Americans, those who have the hardest time saving for retirement.
The new savings vehicle is called myRA. The myRA program essentially allows people to invest in long-term savings bonds that are guaranteed by the U.S. government. Contributions would come directly out of a person’s paycheck. Like a Roth IRA, contributions will be taxed but withdrawals won’t, and a person can withdraw contributions at any time. The minimum initial investment is just $25, and subsequent investments can be made in installments as small as $5. Accounts will be transferable between employers. Managing employee participation in the program is not supposed to cost employers anything.
The myRA program will be available to households earning up to $191,000 per year and is expected to go live in late 2014. People will be able to contribute up to $15,000 to their myRA account before they have to roll it over into an IRA.
A myRA account will earn the same interest rate as the Government Securities Investment Fund, which is variable. Over the past 10 years, the G-fund has returned a compounded interest rate of 3.61 percent, with average annual returns of about 2.5 percent.
If you’re like most Americans and are struggling to put away money for retirement, myRA could be part of a solution. The barrier to entry will be incredibly low, both logistically and financially, and the long-term rewards should be worth the cost. The myRA program is particularly appealing to those without access to a workplace-sponsored retirement account such as a 401(k).
Keep in mind that the myRA program isn’t meant to be the only tool that people use to prepare for retirement. People are encouraged to use the program to build an initial nest egg, which they can then roll into a full IRA.