Cindy is 45 years old making $85,000 per year and wants to implement MAP. She has $20,000 in savings and $50,000 invested in a 401(k). Cindy 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
Cindy’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, Cindy should immediately purchase a Limited-Pay Whole Life policy that fits her budget. Since Cindy is older, she should be targeting a premium payment that is at least 7.0% of her gross salary. Her total contribution towards her retirement should be at least 11.0% of her gross salary. The whole life policy should be paid-up prior to her anticipated retirement date.
The amount of whole life coverage Cindy 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 Cindy 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, Cindy has purchased $212,500 of whole life. Her annual premium payment is $7,016 and her last premium payment is due when she is 59 years old. The premium payment represents approximately 8% of Cindy’s gross salary.
Step 3: Purchase a Deferred Income Annuity
Cindy’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, Cindy has accumulated enough savings by age 57 to cover 3-6 months of lost earnings and can afford to put more towards her retirement.
At this time, Cindy 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. Cindy makes premium payments into her Deferred Income Annuity every year until she retires at age 64. 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 $7,379 in annual income.
In the illustration, Cindy is looking to retire at age 64. 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, Cindy can access the cash value in her whole life policy to generate retirement income. In the illustration, Cindy is able to generate enough income from her 401(k) to defer Social Security to age 69. At this time she should draw from her cash value to defer to age 70. Since Cindy only needs to draw from her cash value for 1 year, she is left with a $137,499 in cash value by the time she draws Social Security.
Cindy’s Social Security and DIA payments alone may not be enough. Cindy could draw from her cash value policy to meet her retirement income needs, or she could replace her whole life policy with an immediate annuity to generate additional lifetime income. In doing so, she should be able to replicate at least 70% of her after-tax pre-retirement income.