My RAs and 401Ks – What to Do?

  • June 3, 2014
Question: I wanted to know your thoughts on the new “myRA”that should be rolling out this year. I have a 401k with my current employer but really like the idea of principal protection even with the small amount of return. I’m 33 years old with approximately 30k total in both accounts. My 401k is set for medium risk with a 3% deposit with 3% match. Should I be more aggressive?
Answer: You’re asking about whether to throw deep or run it up the middle during the first quarter.
Before you decide which plays to run next, I want to make sure you have a game plan.
President Obama introduced the “myRA” during his most recent State of the Union address. It’s supposed to function like a Roth IRA (not deductible up front, but able to grow tax free). Once the program is up and running, anyone making less than $191,000 per year will be able to contribute to a myRA. However, they are really designed to cater to the little guy, allowing payroll deductions as small as $5. They will only invest in government securities, so they will be free of market risk. However, don’t look for much growth at current interest rates.
You expressed interest in them due to their “principal protection.” That tells me you are financially conservative, which is fine.
Let’s just make sure that your financial conservatism is consistent throughout your life. After all, what use is it to be safety minded in one area of your life, if you are taking unreasonable risks in other areas? A loss is a loss.
Protection. If you haven’t had a thorough analysis done of all your insurance policies, you may be asking for trouble. Risk management is job one for a healthy financial life. If “something” happens (wreck, illness, catastrophe, disability, accident, liability or pre-mature death), you may find you make the mistake of buying based on cost, not value.
Be sure your insurance portfolio protects you against being totally wiped out by one of the “big ones” in life. Self-insure against the little stuff that wouldn’t do you in.
Emergency / Opportunity funds. You mentioned having money in your retirement accounts. But what about your savings accounts? I say you need six months of living expenses readily available (in a savings account). This comes before focusing on your retirement accounts.
Cash flow planning. How’s that car out in your driveway looking? Do you know when you plan to buy your next one? More importantly, do you know how you’re going to pay for it?
If your answer is “by borrowing money,” go to the back of the class. Before you decide to put money away for another twenty five years, let’s make sure you aren’t earning 2% “safely” in a myRA while paying interest rates of 10% to 20% on car loans, consumer loans and credit cards.
Investing. When it is time for you to invest, you’ll want to take advantage of your age. Since you do have a while to go until retirement, you can take a longer view. Historically, that argues for accepting some level of volatility in your portfolio to give it the freedom to grow. Portfolios built (often appropriately so) to avoid volatility extremes avoid too much exposure to the equity markets, and in doing so they give up much of the opportunity for growth.
Indulge your conservative side by getting properly protected, feathering your cash nest and making sure you have enough money on hand to fund your near term big purchases. Once those areas are addressed, it might be time to open things up a bit in your retirement funds, “throwing long” with more exposure to equities.
I can promise you, everyone has a plan for you. President Obama has his myRAs. Wall Street has its 401Ks. Banks have their savings accounts and loans for your consumer purchases.
Just make sure you have a plan design by you and for you.
That’s how you’ll win the game.