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URL:  http://boards.fool.com/the-point-of-the-reserves-is-to-avoid-being-30873337.aspx

Subject:  Re: Hi gang... wow!!! Date:  9/16/2013  9:24 PM
Author:  aj485 Number:  72905 of 75375

The point of the reserves is to avoid being forced to liquidate due to catastrophic events when the investment is underwater. catastrophic events aren't restricted to a 5 year smoothed spread.

Gee, I thought we were talking about retirement money. You keep bringing up non-retirement issues, to try to make me think that IULs are great places for retirement money. Sorry, not buying it.

No, you seem to be focusing on the reserves supporting the retirement distribution after the point of financial retirement has been achieved. While worthy, that's less important during accumulation than the avoidance of forced liquidation while in drawdown.

If they are retirement funds, why would I liquidate them before retirement? In my (so far) 28 year working career I have been through 5 years of no/lower income (grad school, unemployment and underemployment) and have not had to touch my retirement funds, other than taking a loan from my 401(k) plan (where I was allowed to make payments, even though I wasn't an active employee) to help pay for grad school. And the only reason I took the 401(k) loan was that it was cheaper than the private student loan I was being offered at the time, so I didn't really need to even touch my retirement funds if I hadn't made the choice to do so.

Holding sufficient reserves separately from the investment accounts is exactly what I am saying is necessary, when investments are exposed to downside volatility.

But it doesn't have to be 53% of the total retirement fund amount. That's where you are mixing up short term volatility with long term planning and goals.

As one nears retirement, a common goal is to have 25 times the initial expected annual expenses during retirement earmarked for retirement. By saying that one has to reserve 53% of the account value to guard against the largest possible downside volatility, you are advocating holding more than 13 additional years of expenses in reserve. I'm saying that at most, one should need 5 years of expenses in reserve to recover from downside volatility. That will allow them to use the reserves instead of selling the retirement investments while they are down. And depending on what other reserves or income can be generated from funds not earmarked for retirement, not even a full 5 years may be needed. If one already has a 1 or 2 year emergency fund outside of the retirement funds, then only 3 or 4 years of expenses would be required to be held as reserves. If one has non-retirement income generating investments that, while their price may have decreased, are still generating, say, 40% of expected annual expenses, along with a 2 year e-fund, that would drop the reserve requirement to 1 year (4%) of the retirement account. That's way less than 53%.

And for someone who has managed to save 30 or 35 years of initial annual retirement expenses in their retirement funds (which is way more likely with the naked B&H strategy than with the IUL strategy), the percent of the account value that needs to be held in reserves is even less.

AJ
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