We’re now firmly into 2014, and a few important changes for savings are worth making note of. MyRA is the most significant change in offering a new class of retirement investment for those on middle incomes, but we also expect a reversion to more normal stock market returns after 2013 and continued expansion of lower fee investment opportunities via ETFs.
MyRA Expected To Launch By The End Of The Year
As announced in the State of the Union address in January, a new government initiative makes it even easier to save for retirement, particularly for those on lower incomes. MyRA (My Retirement Account) is expected to let you open an account with only $25 and add to it from your paycheck in increments of as little as $5. There are not expected to be any fees. These low minimums make it extremely easy to start saving for retirement, and automatic paycheck deductions are a great strategy for building up a nest egg automatically over time.
However, this savings structure is only useful to you if your employer does not offer a 401(k) and unfortunately the money will only earn a low rate of return, even though that return is guaranteed by the government. So as soon as you have a reached a $15,000 in MyRA You can move to a private IRA with more investment options to create a diversified portfolio.
If you aren’t currently saving for retirement, myRA could be a way to started given the low cost and low contribution requirements. Look out for the pilot launching towards the end of the year.
Stock Market Returns Expected To Be Less Than 2013
2013 was a very strong year for the US stock market by historical standards, and looking back over history has about a 1 in 10 chance of being repeated.
However, valuations of US markets now look high relative to history so valuations are unlikely to increase. This is based on Nobel Prize winner Robert Schiller’s analysis that suggests stock prices relative to average stock earnings for the past 10 years are at a relatively high level. In addition, corporate profits are also high by historical standards which makes earnings growth harder to achieve.
Therefore, it’s likely that the US stock market will grow in 2014, but single digit growth is most likely for the coming years. Looking back at over a century of data the US market has grown at 6%, so that’s a reasonable benchmark for 2014 market growth. At the moment the S&P 500 is basically flat for the year so far.
Investment Fees Continue To Fall
Exchange Traded Funds (ETFs) have significantly reduced the cost of investing in a diverse set of stocks for American investors. For example, Vanguard now have an S&P 500 tracker that costs just 0.05% a year in fees. We continue to see the range of assets covered by ETFs and the costs of certain funds decline. Even small savings here can be impactful in saving investors significant retirement dollars, for example paying 1% less in fees during your working years, can example you to have 20% more invested when you reach retirement according to academic research. So continue to look for lower cost funds within your diversified portfolio. To take advantage of this trend, online tools like FutureAdvisor can help you determine a low cost, balanced portfolio for free.
2014 won’t yield drastic changes for investors, but do consider if MyRA is right for you, don’t expect the high stock market growth of 2013 to repeat and continue to look for low cost options for your investments, so that fees don’t eat away at your retirement dollars.
Photo – Christine and David Schmitt