If you are age 25-45 and earning between $50,000-$100,000, I want you to consider “mapping” your retirement. Before I tell you what that entails, let’s take a look at how middle class Americans are doing as they approach retirement.
The system is broken
Let’s be brutally candid. The system for planning for retirement doesn’t work for middle class Americans like you.
Most advisors have significant minimums ($250,000 or more), which prevent you from benefitting from their advice.
Robo-advisors have reduced or eliminated these barriers. They provide sound investment advice, which I generally recommend. They will tell you to save 15-20% of your gross income and to invest in a broadly diversified portfolio of low management fee index funds, exchange-traded-funds or passively managed funds.
In my Smartest series of investing books, I gave the same advice.
It’s now even easier to save for retirement. You can buy just one fund and put all your retirement savings in it. I continue to recommend Vanguard’s Target Retirement Funds and its LifeStrategy Funds. Both funds are excellent choices.
There’s one huge problem. Most won’t do it.
Even if you have the discipline to consistently save, you’re likely to bounce in and out of the market at the wrong times, succumbing to the massive appeal to greed and anxiety which is the daily grist of much of the financial media.
It’s time for a dramatically different approach to planning for your retirement.
That was my goal. I wanted a plan that reduced reliance on the stock market; that provided a guaranteed stream of retirement income that would replicate at least 70% of pre-retirement income; and that was easy to understand and implement.
Working with Patrick Thornton, a Fellow of the Society of Actuaries and an expert on annuities, we came up with “Middle America’s Plan” (MAP). We have a lot of information about MAP on our website.
Details about MAP
MAP works. It puts you on a glide path towards a successful retirement. The key is starting early –-before age 45 and much earlier if possible.
Here are the steps you need to take to implement MAP
1. Start saving. The after-tax savings rate using MAP for those under 45 ranges from 9-18 percent. It only increases at age 45 and above when income is typically higher.
2. Contribute 4 percent of income into a 401(k) or similar retirement plan.
3. Use a very specialized whole life insurance product (“Limited-Pay Whole Life”) to provide income to bridge the gap between retirement and age 70, thereby permitting the middle class to maximize Social Security benefits. This insurance does double duty, providing a death benefit to your loved ones.
4. Use a little known and underutilized type of annuity, called a “Deferred Income Annuity” to add a guaranteed, lifetime stream of income post-retirement.
You can find details on our webpage.
The key to MAP is this fact, unique to middle-class Americans: If you can defer Social Security benefits until age 70, you receive a disproportionate benefit upon retirement. MAP is structured to bridge the gap between age 62, when you can start taking Social Security benefits (which most do, to their detriment) and age 70.
You can implement MAP yourself. Contributing to your retirement plan should be no problem. You will need to consult with an insurance professional for the cash value insurance and the annuity. Most highly rated insurance companies have suitable products. In our illustrations, we used products from New York Life, which would be an excellent choice if you have no preference.
Alternatively, you can contact one of the advisors listed here. They can assist you for a reasonable fee.
Here’s an important caveat: MAP only works if you stay the course. If you let the cash value policy lapse (especially in the early years), your plan will be seriously compromised.
This article discusses the pros and cons of