John is 40 years old making $75,000 per year and wants to implement MAP. He has $15,000 in savings and $40,000 invested in a 401(k). John 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
John’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
Upon adopting MAP, John should immediately purchase a Limited-Pay Whole Life policy that fits his budget. Since John is older, he should be targeting a premium payment that is at least 6.0% of his gross salary. His total contribution towards his retirement should be at least 10.0% of his gross salary. The whole life policy should be paid-up prior to his anticipated retirement date.
The amount of whole life coverage John 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 John 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, John has purchased $187,500 of whole life. His annual premium payment is $5,039 and his last premium payment is due when he is 59 years old. The premium payment represents approximately 7% of John’s gross salary.
Step 3: Purchase a Deferred Income Annuity
John’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, John has accumulated enough savings by age 52 to cover 3-6 months of lost earnings and can afford to put more towards his retirement.
At this time, John 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. John makes premium payments into his Deferred Income Annuity every year until he retires at age 62. His payments should be based on what he can afford so that he still maintains enough savings to cover 3-6 months of his gross salary. In the illustration, the total guaranteed future income generated from his annuity will amount to an additional $11,826 in annual income.
In the illustration, John is looking to retire at age 62. 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, John can access the cash value in his whole life policy to generate retirement income. In the illustration, John is able to generate enough income from his whole life policy to defer taking Social Security for 3 years. When John’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 approximately 67% of his after-tax pre-retirement income. This may be enough for John, but if not, he still has cash value left in his whole life policy that he can draw from if he needs to.