Our Plan to Save the Middle Class

The problem

Middle America’s Plan (MAP) solves a massive problem for middle class Americans (defined as those earning between $50,000 and $100,000 annually).  Based on census data, we estimate this demographic includes as many as 40 million people.

A Wells Fargo survey found 37 percent of middle class Americans said they’ll never retire and plan to either work until their health fails or they die.  Another 34 percent plan to work until they’re 80.

Even those nearing retirement are woefully unprepared.  The average individual between 55 and 64 has only $104,000 in savings.  Invested in an annuity, this nest egg would yield a monthly income of only $310.

Solving this problem requires a different, unique and game-changing approach.  One that:

  • Has realistic savings goals;
  • Is easy-to-understand and implement;
  • Reduces reliance on the stock market; and
  • Provides a way to replace a minimum of 70 percent of pre-retirement net income for those earning $50,000-$100,000

MAP is this plan.


Traditional Advice Hasn’t Worked 

Traditional advice tells middle class Americans to spend less, save more and invest in the stock market.  It hasn’t worked in the past and is unlikely to be adopted in the future.

According to a Gallup survey, only 54 percent of those earning $30,000 to $75,000 own any stock.

According to Bankrate, the middle class doesn’t own stocks because they can’t afford to, don’t know enough about stocks, don’t trust stockbrokers and believe stocks are too risky.

Instead of trying to overcome these objections, MAP accepts them and provides a better alternative.

Summary of MAP

Here’s MAP in a nutshell.

  1. Establish realistic savings goals for the middle class. 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 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 bridge the gap between retirement and age 70, thereby permitting the middle class to maximize Social Security benefits.
  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.

Leveraging Social Security Benefits

A central and unique tenet of MAP is a plan that permits the middle class to defer Social Security until age 70.  The benefit of doing so is particularly meaningful for the middle-class.

At present, only 2 percent of men and 4 percent of women wait until age 70 to take their benefits.  In fact, almost 50 percent of retirees take Social Security benefits as soon as they are eligible, even though their benefits are reduced by 25 percent.  These numbers are likely more jaw dropping for the middle class, because they are under more financial strain when nearing retirement.

“These numbers are likely more jaw dropping for the middle class.”

The impact of delaying benefits on retirement income is significant.  If the middle class delayed taking benefits until age 70, instead of taking them as soon as they become eligible, the effect would be to increase those benefits approximately 8 percent per year up to age 70, resulting in a 76 percent increase in Social Security payments, for life.

Provided Social Security benefits are deferred to age 70, the income generated from Social Security benefits alone can replace as much as 60 percent of after-tax, pre-retirement income for those earning $50,000-$100,000.

By following the low-risk advice in MAPthe middle class will achieve these increased benefits, earn an additional stream of guaranteed post-retirement income from the innovative use of another insurance product, and be able to maintain their quality of life in retirement.

Will Social Security Be Available? 

Since maximizing Social Security benefits is a critical part of MAP, it’s reasonable to question its viability.

According to the Social Security Administration, Social Security is fully funded until 2034.  After that period, it’s about three-quarters financed.  In a worst case scenario, benefits would be reduced by 25 percent.  This is very unlikely.

Congress has many options to avoid curtailing or eliminating social security benefits.  These include “increasing contribution rates, lifting the cap on earnings subject to contributions, drawing on other revenue sources, lowering benefit amounts, or a combination of changes.”

The Social Security Administration believes “moderate reforms could restore financial balance while improving the equity and efficiency of the system.”  It observes that, “[E]ven if benefit cuts are implemented, they can easily be designed so that real benefits are not reduced over time, only cut back relative to current promises of future growth.”

A majority of Americans believe Social Security is one of the most important government programs.  Politicians are likely to be sensitive to the views of these voters, when “moderate” reform of the system is readily available to deal with projected shortfalls.

Implementing MAP is a simple, three stage process.

How MAP Works 

Implementing MAP is a simple, three stage process.

#1:  Invest in a 401(k) or an IRA

The first part of our plan requires members of the middle class to contribute 4 percent of gross salary and invest those funds in a 401(k) or an individual retirement account.    We conservatively assume an employer match of 2 percent of gross salary.

401(k) funds should be invested using low cost index funds or target date funds.

Since there are significant penalties for early withdrawal of retirement funds, it’s likely compliance will be high and this nest egg will be available when participants retire.

#2: Limited-Pay Whole Life Insurance

The primary purpose of purchasing life insurance (term or whole life) is to protect heirs when the policyholder dies.

Our use of whole life insurance is different.  It’s to provide sufficient income from accumulated cash value built up in the policy so the policyholder can defer taking Social Security benefits until age 70.  To our knowledge, whole life policies have never been leveraged before for the primary purpose of deferring Social Security. 

There’s a very specific type of whole life policy suitable for this purpose.  It’s not well known and is available from relatively few highly rated insurance companies.  It’s a “Limited-Pay Whole Life” policy.

These policies guarantee tax-deferred cash value accumulation and a guaranteed level death benefit.  Premiums are level and are guaranteed never to increase (with rare exceptions, generally not applicable when the policy is issued by a highly rated, reputable insurance company).  The policy can’t be cancelled as long as premiums are paid.

The premium-paying period is shorter than most other policies, and cash value accumulates much faster.  Once the premium payment period ends, no additional premiums are required to keep the policy in force and its value will continue to increase.

Limited-Pay Whole Life policies allow the policyholder to choose when premium payments end, and the premium amount is adjusted accordingly.

With MAPwe customize premiums to end at age 60, when most members of the middle class will begin to feel financial pressure, often causing them to elect Social Security benefits at age 62, with tragic consequences.

“There are other important benefits to owning this policy.”

A Limited-Pay Whole Life policy should be purchased immediately.  Assuming a 35 years old male purchases a $250,000 Limited-Pay Whole Life policy, he would pay an annual premium of $4,940, until he reaches the end of his payment period at age 60.

Assume he retires at age 64 and exhausts his 401(k) balance by age 67.  At this time, he could tap into the policy’s projected cash value of $331,468 to help fund his living expenses. This will enable him to generate income until he reaches age 70, and thereby maximize his Social Security benefits.

There are other important benefits to owning this policy.  Most Americans are underinsured, or have no life insurance at all.  Most adults with children under 18 years old would “…have trouble meeting everyday living expenses within a few months if a primary wage earner were to die today.”

The policy can be further customized to provide for early access to death benefits for chronic or terminal illness.

#3:  Deferred Income Annuities

A Deferred Income Annuity is specifically designed for pre-retirees to lock-in a guaranteed stream of income, which is scheduled to start at some future date. These annuities are typically purchased between the ages of 50 and 70.

MAP uses a Deferred Income Annuity to lock-in additional income to supplement Social Security benefits at age 70.

Although deferring Social Security to age 70 can replace as much as 60 percent of after-tax pre-retirement income for the middle class (as defined), it’s not enough.  In order to maintain their quality of life, the middle class needs to replicate at least 70 percent of that income.

MAP uses a Deferred Income Annuity (DIA).  This annuity is relatively new to the market, and under-utilized by pre-retirees.  It provides guaranteed lifetime income and offers customizable features, including the option to make additional premium payments, select from a variety of payout options (life only, life with cash refund death benefit, single or joint payout), and the ability to change the start date of the annuity payments.

We assume this annuity will be purchased between the ages of 45 and 55, which is the age where our analysis shows the middle class can afford to start making premium payments.


Does MAP Work?

Our illustrations demonstrate how MAP works in various situations.  We make assumptions related to income, taxes, cost of living, housing, and other expenses that can put financial pressure on an individuals ability to save.

Why MAP’s a Game-Changer

MAP is a game-changer:

  • It minimizes reliance on the stock market.
  • It eliminates bad investor behavior, which causes investors to panic when markets drop and “buy high and sell low”.
  • It’s very low risk, with the vast majority of retirement income guaranteed by the most highly rated insurance companies who have never defaulted in over 100 years.
  • It’s a plan that works only for the middle class.
  • It gives the middle class stress free confidence they can retire and maintain their quality of life.
  • It’s achievable and easy to implement.

Next steps

Our “Need Help” section lists financial advisors and insurance agents who can assist you in implementing MAP.  We are updating the list on a regular basis.

Please contact us with questions.  We will try to answer everyone and will publish a list of frequently asked questions and our responses.