Tom is 30 years old making $50,000 per year and wants to implement MAP. He is saving up for a down payment on a house, and has $20,000 in savings and $15,000 invested in a 401(k). Tom should discuss his financial budget and goals with a MAP-certified financial advisor prior to implementing MAP.
Implementing MAP is a 3-step process.
Step 1: Invest in a 401(k) or IRA
Tom’s employer sponsors a 401(k) plan and also offers a matching program. His employer will match 50% of his contributions, up to a maximum total match of 2% of his gross earnings. His first step in adopting MAP is to contribute 4% of his gross salary to his 401(k), thereby providing him with the full company match. He should be 100% invested in a Vanguard Retirement Fund, or similar low-cost target-date index fund. He should set up his contributions through payroll deduction and let his 401(k) run on auto-pilot.
Step 2: Purchase a Limited-Pay Whole Life Policy
Tom is currently saving for a house, which can be a worthwhile long-term investment. He should wait until he has purchased a house, and then immediately purchase a Limited-Pay Whole Life policy that fits his budget. He should be targeting a premium payment that is at least 5.0% of this gross salary, so that his total contribution towards his retirement is at least 9.0% of his gross salary. The whole life policy should be paid-up prior to his anticipated retirement date.
The amount of whole life coverage Tom decides to purchase should suit his long-term needs. If he cannot afford the coverage that he needs, he should first consider eliminating additional riders and add-ons to reduce the cost, or extending the premium paying period on the policy. If he still cannot afford the coverage, he should consider reducing the coverage on the policy. If Tom needs more coverage in the near-term, and can afford it, he should consider buying additional Term coverage at a lower cost.
In the illustration, Tom has purchased $150,000 of whole life coverage at age 35 after he makes the purchase on his house. His annual premium payment is $2,974 and his last premium payment is due when he is 59 years old. This premium payment represents approximately 5% of Toms gross salary.
Step 3: Purchase a Deferred Income Annuity
Tom’s salary is assumed to increase by 3% each year, which is 1% above the rate of inflation used in the illustration. His cost of living expenses are also growing with inflation, but his total expenses are growing at a slower rate than his salary. In the illustration, Tom has accumulated enough savings by age 44 to cover 3-6 months of lost earnings, and can afford to put more towards his retirement.
At this time, Tom should purchase a Deferred Income Annuity to secure his retirement with guaranteed lifetime income. He should elect for his future guaranteed income to start at the same time he expects to collect Social Security, at age 70. Tom makes premium payments into his Deferred Income Annuity every year until he retires at age 60. His payments should be based on what he can afford, so that he still maintains enough savings to cover 3-6 month of his gross salary. In the illustration, the total guaranteed future income generated from his annuity will amount to an additional $24,753 in annual income.
In the illustration Tom is looking to retire at age 60. At this time, he should draw from his 401(k) first to generate retirement income. The cash value in his whole life policy is likely to grow at a faster rate than his 401(k) at this age. Once his 401(k) runs out, Tom can access the cash value in his whole life policy to generate retirement income. He will not incur any taxes until he has drawn down his cost basis in the policy. In the illustration, Tom is able to generate enough income from his whole life policy to defer taking Social Security for 3 years. When Tom’s cash value runs out, he starts his Social Security benefits and the income stream from his Deferred Income Annuity. He is able to replace more than 80% of his after-tax pre-retirement income.