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Investing/Strategies / Retirement Investing
|Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1]||Date: 4/4/2013 11:59 PM|
|Author: Rayvt||Number: 71717 of 77572|
what I want to solve for is the total income distribution over a 10 year drawdown in full. The naked position will do a straight liquidation, and the IUL will continue the 0/12 principal growth
After thinking about it, I can't make any sense out of it.
Do people actually do this? Do a 10-year liquidation (or "income distribution")? Why?
Usually people in retirement want a more-or-less constant periodic monthly income stream to last their entire life expectancy -- or typically 25-30 years. I can't see many people wanting to do some method where the amount varies greatly depending on the growth (or lack thereof) in the investment account, and have it exhausted in 10 years.
Naively, the 1st year distribution would be 10% (1/10), the 2nd year 11% (1/9) of the balance, the 3rd year 12.5% (1/8), etc.
In the example, at the start of the 10 year drawdown period, 10mSMA account balance is $421K. In the IUL account balance is $184K.
All else being equal, the first will deliver a total distribution in the neighborhood of $421K, and the second will deliver about $184K.
Income of $42K per year is more than $18K per year. If the first loses 50% inthe first and never recovers, that would be $21K per year. Which is *still* more than $18K.
So what are we trying to determine? That in a very bad case the IUL would only be a little worse than the S&P, as opposed to much worse in the case that there isn't a bear market? Who cares? Worse is worse.
Also, in deccumulation, the 0% floor isn't really 0% anymore. With a 10% withdrawal rate, the effective floor is -10%, because that's how much your account will go down if the market has a loss.
But the cap is still 12%, so everything works against you. You face a maximum decline of -10% (0% floor minus 10% withdrawal), but the most you can grow is 2% (12% cap minus 10% withdrawal).
One -10% drop will wipe out five 2% increases. So basically the IUL will always steadily glide down to zero.
But the S&P delivers anywhere between 2 and 3 times the annual income. And the headroom on the high side isn't capped at 2% -- it goes all the way out to 30%+ (albeit with decreasing frequency at higher gains).
I already did the chart showing a constant $1500/mo draw. IUL is visible headed for zero, and the S&P account is still increasing.
But, okay, I can change the parameters to see what constant draw takes the account to zero on 12/31/2012.
For $10,000 initial deposit and $100/mo, IUL with 0/2; S&P 10mSMA:
Balance on 1/1/2002: IUL = $183,600 S&P500@10mSMA = $427,536
Fixed withdraw of $1,975/mo takes the IUL to zero.
120 mo @$1975 = $237,000.
Fixed withdraw of $4,630/mo takes the S&P500@10mSMA to zero.
120 mo @$4630 = $555,600.
$4,630 is greater than $1,975
$555,600 is greater than $237,000
I don't see any particular reason to go further, to be more exact. One is TWICE as good as the other -- and that's in a time-period with 2 large bear markets. What more would you want to know?
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