Wednesday, February 5, 2014

New Retirement Plans for Government Contractors

Okay, so this post is not strictly about Government contracting but it is something that Government contractors should be aware of and should encourage their employees to participate in. It's the President's new retirement savings program he announced at last month's State of the Union address. It's called 'myRA'.

The concept is pretty simple. Employees can have as little as $5 taken out of each paycheck and deposited into a Government bond fund. By deducting money from paychecks before workers receive them, the investments will steadily grow without any decision making required. After that, it works much like a Roth IRA - keep the money in for a minimum amount of time and the earnings can be withdrawn tax-free. Like Roths, there are wage thresholds above which employees will not be eligible to participate.

There's good and bad to this program. The good is that it requires very little up-front investment - $25 to open the account and as little as $5 after that. Also, since the Government controls the investment, there are no fees to be paid to brokerage firms and investment advisers. Secondly, investors will never lose their principle, unlike stocks and mutual fund values.

The bad part is that the returns on Government bonds have always been anemic. Right now, the returns are under two percent. Most investment advisers believe that even with their fees, they can achieve greater returns. 

About 40 percent of workers don't have any kind of retirement plan and more than 50 percent of American's are not saving enough money to maintain the standard of living they enjoy during their working life. Social Security is not going to be enough - workers need to save for retirement. In the scheme of things, this new 'myRA' isn't going to solve the problem of insufficient retirement by itself, but is a step in the right direction.

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