Sarah is 35 years old making $65,000 per year and wants to implement MAP. She has $15,000 in savings and $25,000 invested in a 401(k). Sarah should discuss her 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
Sarah’s employer sponsors a 401(k) plan and also offers a matching program. Her employer will match 50% of her contributions, up to a maximum total match of 2% of her gross earnings. Her first step in adopting MAP is to contribute 4% of her gross salary to her 401(k), thereby providing her with the full company match. She should be 100% invested in a Vanguard Retirement Fund or similar low-cost target-date index fund. She should set up her contributions through payroll deduction and let her 401(k) run on auto-pilot.
Step 2: Purchase a Limited-Pay Whole Life Policy
Upon adopting MAP, Sarah should immediately purchase a Limited-Pay Whole Life policy that fits her budget. She should be targeting a premium payment that is at least 5.0% of her gross salary so that her total contribution towards her retirement is at least 9.0% of her gross salary. The whole life policy should be paid-up prior to her anticipated retirement date.
The amount of whole life coverage Sarah decides to purchase should suit her long-term needs. If she cannot afford the coverage that she needs, she should first consider eliminating additional riders and add-ons to reduce the cost, or extending the premium paying period on the policy. If she still cannot afford the coverage, she should consider reducing the coverage on the policy. If Sarah needs more coverage in the near-term and can afford it, she should consider buying additional Term coverage at a lower cost.
In the illustration, Sarah has purchased $195,000 of whole life. Her annual premium payment is $3,395 and her last premium payment is due when she is 59 years old. The premium payment represents approximately 5% of Sarah’s gross salary.
Step 3: Purchase a Deferred Income Annuity
Sarah’s salary is assumed to increase by 3% each year, which is 1% above the rate of inflation used in the illustration. Her cost of living expenses are also growing with inflation, but her total expenses are growing at a slower rate than her salary. In the illustration, Sarah has accumulated enough savings by age 47 to cover 3-6 months of lost earnings and can afford to put more towards her retirement.
At this time, Sarah should purchase a Deferred Income Annuity to secure her retirement with guaranteed lifetime income. She should elect for her future guaranteed income to start at the same time she expects to collect Social Security, at age 70. Sarah makes premium payments into her Deferred Income Annuity every year until she retires at age 61. Her payments should be based on what she can afford so that she still maintains enough savings to cover 3-6 months of her gross salary. In the illustration, the total guaranteed future income generated from her annuity will amount to an additional $18,269 in annual income.
In the illustration, Sarah is looking to retire at age 61. At this time, she should draw from her 401(k) first to generate retirement income. The cash value in her whole life policy is likely to grow at a faster rate than her 401(k) at this age. Once her 401(k) runs out, Sarah can access the cash value in her whole life policy to generate retirement income. In the illustration, Sarah is able to generate enough income from her whole life policy to defer taking Social Security for 3 years. When Sarah’s cash value runs out, she starts her Social Security benefits and the income stream from her Deferred Income Annuity. She is able to replace more than 70% of her after-tax pre-retirement income.