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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Hi gang... wow!!! Date: 4/14/2013 2:13 AM
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Got me a bit of a tan, and wayyy too many additional pounds (all-inclusive family-oriented resort vacationing... great for managing the toddler, relaxing overall... hell on the svelte figure!)

I've done a very surface skimmage over the past several epic threads (just here... nothing about the derivative spin offs at RECFIRE or anywhere else anything may have emigrated.)

Ray, I suspect you may not see this for a while (at least I hope so... "going dark" on technology once in a while is a great cleansing process!) THANK YOU for uploading your spreadsheet. I just downloaded it, and haven't even cracked the cover (and might not even really be able to for a couple days yet... much to catch up on for me... 3 big family private reserve cases in development/processing, and a big periodic compliance audit knocking on my door I need to prep for as well.)

From the commentary in Ray's posts, I *SUSPECT* there are some issues being missed or ignored... particularly around drawdowns and risk of ruin. I won't say this is for certain until I've dug in & gotten deeply dirty on Ray's work (I have no doubt that it is of the highest integrity at his disposal from assumptions and data available. Often times mistakes occur from *expectations* and perception rather than outright deception.)

I noticed that references to drawdowns were limited to just 2-3 years (again, I very superficially skimmed so far, so if I am wrong I apologize in advance.) The S&P500 has quite a few 50% (70% including inflation) drawdown periods where highwater is not re-attained for 20-25 years. That is not insignificant, and in every one of these periods a zero-floor, capped hedge position will outperform, all else equal.

What I also anticipate doing... is using a financial projection relational database to build out a model, from scratch, rather than initially conforming to Ray's model... and when I am done we can compare & contrast. Models are often built from an 'expectation skew' (not saying that Ray's necessarily is... but building fresh on an app designed for the purpose may allow us to cross-view for discrepancies.)

*SO*... although I am back, I must still pre-apologize that my model production is not promised to come quickly, simply because while I trust it will be interesting, its of lower importance in my limited daily hours of productive time. I hope to have something ready near the end of this coming week, but it might be 2 weeks.

Again..... *wow*.... !

Cheers,
Dave Donhoff
Leverage Planner
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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72099 of 74759
Subject: Re: Hi gang... wow!!! Date: 4/22/2013 7:04 PM
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Yes, wow. You learn something new every day. For example, I learned that TMF has cesspool boards like "Retire Early CampFIRE". Just can't understand why people would come to a finance site to engage in political brouhaha's -- isn't that what Yahoo boards are for? With threads like http://boards.fool.com/catherine-gone-30632910.aspx?sort=who... all I can do is thank the lord that these people mostly stay away from boards about Making Money.

What I also anticipate doing... is using a financial projection relational database to build out a model, from scratch, rather than initially conforming to Ray's model... and when I am done we can compare & contrast. Models are often built from an 'expectation skew' (not saying that Ray's necessarily is... but building fresh on an app designed for the purpose may allow us to cross-view for discrepancies.)
Two eyes are better than one -- and a fresh clean-slate look is a great way to uncover faulty assumptions.

But, well, my spreadsheet is just looking at actual historical data, no "financial projections" involved. 'course there may be a blind spot in the way I looked at it, so it'll be interesting to see what you come up with (since it appears that CC won't be showing us any of her data).

references to drawdowns were limited to just 2-3 years ... The S&P500 has quite a few 50% (70% including inflation) drawdown periods where highwater is not re-attained for 20-25 years. That is not insignificant, and in every one of these periods a zero-floor, capped hedge position will outperform, all else equal.

I don't recall saying anything specific about drawdown periods. Except, perhaps, a mention that I look at 12-month drawdowns (i.e., drop in value from the 12-month high) rather than the standard "drop from the most recent peak". That's because I can't figure out how to make Excel find the "most recent high value", since excel searches don't really like to look backwards, only forwards. And also because in my early investigations 12 month drawdown tells you everything that 24 month or 36 month tells you.

However, your remark prompted me to add yet another piece to the spreadsheet. Something that I've always kinda wanted to know but never actually investigated. To wit, the length of historical drawdowns.

So I added code to the spreadsheet to find the distance from each month to the next month which had a greater value. This is the number of months it takes to recover when the S&P gets hit for a loss. As you might expect, most were 1 -- the next month is higher. 81% were 3 or less months, which aren't really losses, just pullbacks. (Note that this method doesn't have anything in common with "12-month drawdown".)

"highwater is not re-attained for 20-25 years"
This statement is incorrect.

For the monthly data of S&P500 (buy-and-hold) from Jan 1950 to now, including dividends, the longest recovery time was 74 months (just over 6 years).
Excluding dividends, the longest was 91 months (7 1/2 years).
The deepest loss from peak was -52% (no dividends), or -51% (with dividends).

But as I discussed with CC, what matters is not so much the percentage loss but the absolute dollar amount of the account value. A 50% loss from $700K to $350K is one thing, but when the alternative zero-floor, capped hedge position stands pat at no loss from its $128K value ....
Well, no matter how you look at it, $350K is more than $128K. You may *feel* that loss, but you have more money to spend.

Another bit of code I put in was to show not only the S&P drawdowns, but also the IUL value at the same point in time. So you can see the difference in values at the low point, for both S&P and IUL.

The S&P is not always ahead. Sometimes indeed it drops below the IUL. For a 1/1/65 start with $10,000 -- the S&P value dropped from $18K on Dec-72 to $10K on Jun-76, a 43% loss. The IUL was $15K.
Going forward, the S&P dropped from $30K on Nov-80 to $25K on Oct-82. The IUL was $22K.

Moving to the end of the 30 year period, Jan-95, S&P was $167K and IUL was $52K.

A major major anchor that the IUL is burdened with is the exclusion of dividends. For example, S&P (buy-and-hold) of $10K on Jan-65 grows to $54K on Jan-2013 WITHOUT dividends, but $167K WITH dividends. Over a long term, the bulk of the gain is attributable to the reinvested dividends.

For a long-term investment, the no-loss-ever low volatility of the IUL comes at a very heavy price. The problem is that after about 20 years from the start, the S&P has pulled so far ahead of the IUL that even a huge drop is way far more than the IUL.

Anyway, I'm looking forward to what you come up with. And particularly interested in any errors you find in my spreadsheet.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72101 of 74759
Subject: Re: Hi gang... wow!!! Date: 4/23/2013 12:17 AM
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That's because I can't figure out how to make Excel find the "most recent high value", since excel searches don't really like to look backwards, only forwards.

=Max(A1:A27).

Substitute whatever cells you are actually checking for "A1:a27". For what it's worth, I use this on the Case-Schiller housing index spreadsheets to quickly check drop from peak, and use the Vlookup function in conjunction with that to determine the month in which that peak occurred.

-synchronicity, spends way too much time in Excel.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72102 of 74759
Subject: Re: Hi gang... wow!!! Date: 4/23/2013 12:33 AM
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=Max(A1:A27).

Yeah, but what I'm looking for is actually "=max(since previous peak)".

I know, the strict definition is " max(from beginning of time : now)" --- but nobody actually USES it that way. In usage, everybody treats it as the most recent peak. Nobody cares about a drawdown from a peak that happened 50 years ago. They care about the peak that happened in the last few years or less. Heck, the thing that most people only look at is the current price vs. the 52-week high.

Or maybe I'm overthinking it. Anyway, 12-month drawdown is Good Enough for my purposes. The bear markets of 2001 & 2008 kinda swamp out any older peaks.

The other drawdown that I personally look at is "drawdown since Sept 2006 when I walked out the door and retired early".

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72103 of 74759
Subject: Re: Hi gang... wow!!! Date: 4/23/2013 9:36 AM
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Let's say the date is in column A, price in B, recent peak in C, date of recent peak in D.

In cell C11, you would have the formula: {=MAX(IF($A$2:A11>D10,$B$2:B11,0))} (use ctrl-shift-enter to make it an array formula as indicated by the {})

In cell D11, you would have the formula: =INDEX($A$2:A11,MATCH(C11,$B$2:B11,0))

Something like that should work. You may need to put in a valley since really, you're looking for the peak after the valley.

-murray

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72297 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/27/2013 9:35 PM
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*SO*... although I am back, I must still pre-apologize that my model production is not promised to come quickly, simply because while I trust it will be interesting, its of lower importance in my limited daily hours of productive time. I hope to have something ready near the end of this coming week, but it might be 2 weeks.

It has been 5 weeks now. Are you still working on the model or are you conceding to Ray?

PSU

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72299 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/28/2013 1:16 AM
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Hi PSU,

It has been 5 weeks now. Are you still working on the model or are you conceding to Ray?
Oh, no concession... frankly, I'd let it brew on low heat on my tasklist. I didn't think there was any sincere interest here... it felt like teaching phlebotomy to a jehova witness conference.

Am I wrong? Is there a real interest for learning something so contrary to what wants to be believed here?

Dave

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72300 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/28/2013 2:18 AM
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Am I wrong? Is there a real interest for learning something so contrary to what wants to be believed here?

I say without fear of correction that the majority of people here don't want to believe things, we want to know things.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72301 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/28/2013 2:27 AM
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Dwdonhoff asks,

<<<It has been 5 weeks now. Are you still working on the model or are you conceding to Ray?>>

Oh, no concession... frankly, I'd let it brew on low heat on my tasklist. I didn't think there was any sincere interest here... it felt like teaching phlebotomy to a jehova witness conference.

Am I wrong? Is there a real interest for learning something so contrary to what wants to be believed here?

</snip>


I guess it's kind of like Cold Fusion. It would be wonderful if it worked. But every time the data gets scrutinized by someone who can do the math, it fizzles.

http://en.wikipedia.org/wiki/Cold_fusion

The California Institute of Technology, led one of the most ambitious validation efforts, trying many variations on the experiment without success, while CERN physicist Douglas R. O. Morrison said that "essentially all" attempts in Western Europe had failed.[6] Even those reporting success had difficulty reproducing Fleischmann and Pons' results.[37] On April 10, 1989, a group at Texas A&M University published results of excess heat and later that day a group at the Georgia Institute of Technology (i.e., Georgia Tech) announced neutron production—the strongest replication announced up to that point ... Another attempt at independent replication, headed by Robert Huggins at Stanford University, which also reported early success with a light water control


I remember one researcher at MIT hypothesized that Cold Fusion only worked in the presence of Division 1A Football.

intercst

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72306 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/28/2013 7:46 PM
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Hi Sykesix,

the majority of people here don't want to believe things, we want to know things.
Good! Along with your post, at least 5 people (at present) agree.

We started out with Ray conceding that he had no competitive way of getting the same results with the same safety at a lower price than an IUL.

I conceded that when an unlimited loss tolerance is acceptable, I have many other ways to potentially outperform an IUL... but unlimited loss tolerance isn't a characteristic of foundational retirement accounts.

We agreed to explore how a naked S&P hold might compare to a hedged 0/12 strategy on the S&P, with the advance stipulations of our mutual concessions... and we *can* still do that further, if there's actually interest. It doesn't appear that there actually is, though (at least not judging by recs, and the lack of inquiries in regards to the non-loss strategies.)

It appears to me that a massive amount of electrons appear to have been contorted into a contest that never was.

I see some massive gaping holes in the acceptance of unlimited loss risks... The greatest 10, 20, 30 bagger opportunities occur when you have not lost any cash, and everyone else has been decimated and are waiting/praying for "the markets to come back."

The greatest risks of collapse (foreclosure, bankruptcy, etc.) come at the exact same time.
(Not ironically, the greatest opportunities usually come *FROM* bailing out foreclosures, bankruptcies & similar states of desperation!)

Going naked in a market with frequent and unpredictable 30-50% drawdowns might be fine for the top 10-20% of a person's risk pyramid distribution... but not the foundation that everything is built upon, at risk of complete collapse.

What do you want to know that you suspect you do not?
Where is there an interest for learning here?

Dave

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72307 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/28/2013 11:42 PM
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Am I wrong? Is there a real interest for learning something so contrary to what wants to be believed here?

Oh, Dave, please don't go all CC on us. This is not a matter of "believe" or "religion". Da numbers is da numbers.

We are traveling right now, but will be home in a few days. Trying to do any kind of real work on this netbook is a pain.

I've updated, refined, and extended my spreadsheet and kinda been waiting to upload the latest version. Which I'll do when we get home. No, I lie. I have it here with me--I'll ul it now.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72309 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/29/2013 12:19 AM
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Hi Ray,

Oh, Dave, please don't go all CC on us. This is not a matter of "believe" or "religion".
HAH... don't worry, I'm not going off on flax seeds or down on life herafter... I think you have to admit though, there *IS* a not insignificant degree of faith-based belief here (or maybe you have to have the outside perspective to see it, perhaps...)

Da numbers is da numbers.
Whatever you say Disraeli.

We are traveling right now, but will be home in a few days. Trying to do any kind of real work on this netbook is a pain.
Fugghedaboutit... enjoy! You've played & timed & traded the markets well & deserve the just desserts!

Dave

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72317 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/29/2013 5:14 PM
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HAH... don't worry, I'm not going off on flax seeds or down on life herafter... I think you have to admit though, there *IS* a not insignificant degree of faith-based belief here (or maybe you have to have the outside perspective to see it, perhaps...)

I admit there is a significant amount of skepticism here. The faith-based beliefs seem to be held entirely by you and CC. IUL's were initially touted as having supernatural powers (claims later downgraded and modified--fair enough, it is okay to clarify), including outperformance "in the vast majority of markets at a fraction of the cost overhead."

Now outperforming the vast majority of markets sounds pretty darn good to me, and if that's really the case I'd like to sign up, but I haven't seen any evidence (such as backtest or actual historical results) that those claims are even remotely true. None at all. Zero. Way back in January, you said you were going to put together a spreadsheet showing how all this worked. Great! Except you never did. And subsequently several times you promised, actually you *GUARANTEED* (emphasis original) you were going to do this Real Soon Now.

Real Soon Now has come and gone a few times since then and *now* the reason the spreadsheet doesn't exist is because readers of this board will simply reject the truth, therefore we don't deserve to see it. Catherine said the same thing about her secret backtest. Unless you believed already, you weren't worthy to look upon it. But unless you look at the results, how do you know if it works?

Two different philosophers have spoken on how to approach this conundrum:

"Except ye see signs and wonders, ye will not believe."

--Jesus

Vs.

"Extraordinary claims require extraordinary proof."

--Carl Sagan

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72318 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/29/2013 5:23 PM
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Syke,

including outperformance "in the vast majority of markets at a fraction of the cost overhead."

Just as before, I'll say again;
With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.

It doesn't always outperform accounts with deper loss tolerances... but if you want more risk in order to chase more profits, the liquidity lets you do it on a smart selection basis, rather than being forced to "weather it out" during drawdowns.

*THAT* is a feature design suitable to the financial foundation of a personal (and even business) balance sheet.

Find us better, and I'm all ears.
Dave Donhoff
Leverage Planner

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72319 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/29/2013 11:56 PM
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With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.

To quote Tom Cruise "Show me the money!"

You say nothing can outperform, yet it's all talk while others have shown real historical data that counters this statement.

Again, I don't "believe" squat other than numbers and if you've shown any real returns in a post, I missed it. As mentioned, you're the one pushing us to "believe" with zero evidence.

-murray

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Author: BoredPerson One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72320 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/29/2013 11:58 PM
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In other words, you're not getting a spreadsheet. I don't have to prove my method outperforms. Take it on gospel.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72321 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/30/2013 12:48 AM
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Just as before, I'll say again;
With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.


Yep, and if you ask who is the best American president with Warren G. Harding's height, weight, and anniversary there is only one clear winner.

The most important question to most people i.e. "how well do these things perform?" isn't in your list of important criteria. Shouldn't that be the first thing you look at? Is making money really less important that 90% leveragability? It is like buying a car based on the brand of tires or selecting a hotel based on the hallway carpet color. Or choosing a job because the employee lunchroom has free drink refills and not asking about the salary. Or getting a loan because you like the banker's shoes and not asking about the interest rate.

"Hey, I didn't make any money, but I'm thrilled I kept my 20 year average all-in expense ratio under 1%!"

It doesn't always outperform accounts with deper loss tolerances... but if you want more risk in order to chase more profits, the liquidity lets you do it on a smart selection basis, rather than being forced to "weather it out" during drawdowns.

And who specifically has successfully used this strategy and is dollars ahead? I'm willing to bet the answer is nobody. The answer could be "nobody yet," but you haven't even shown how your strategy might work. Extraordinary claims...

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72322 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/30/2013 1:49 AM
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Dwdonhoff elucidates (in lieu of a spreadsheet),

Just as before, I'll say again;
With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.

</snip>


What a surprise -- another insurance salesman who's "all hat and no cattle".

intercst

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Author: ItsGoingUp Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72323 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/30/2013 12:36 PM
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Dwdonhoff writes:
With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.

Dave, I thought you were a reputable guy. This kind of handwaving after promising real numbers is a serious disappointment.

-IGU-

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72325 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/30/2013 7:14 PM
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Just as before, I'll say again;
With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.

It doesn't always outperform accounts with deper loss tolerances...


You know, you keep touting that there is 'zero risk' in an IUL, as long as you are willing to pay the fees and limit yourself to the imposed caps. But you seem to ignore a huge risk, especially if one has all of their money in a single IUL.

You are counting on the insurance company to continue paying you. But what if they go belly up? You don't even own any of the stock that your investment returns are based on - all you own is a contract with an insurance company that is belly up. A 'zero floor' on losses isn't going to help you much if your IUL is more than the coverage that your state provides on your policy (and some states don't even cover variable insurance products with their insurance funds).

Sure, it doesn't happen often. But it does happen - check out Executive Life. It almost happened to AIG during the financial crisis, until they got bailed out. And with insurance companies making promises to 'take all the losses' and only guarantee you 'positive returns' (for a fee, of course), the derivatives that the insurance companies offering these type of contracts are hedging themselves with are only as good as their counterparties.

There will be another financial crisis - for 'black swan' events, they seem to happen fairly regularly - it's just a different black swan each time. I'd have to question if the risk of having all of my money invested in an IUL during the next one.

AJ

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72328 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/31/2013 12:01 AM
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With a zero annual floor, at a 20 year average all-in expense ratio under 1%, and a 90% leveragability at net zero cost (and actually often a positive credit arbitrage,)... nobody's brought forth anything that can outperform.

It doesn't always outperform accounts with deper loss tolerances... but if you want more risk in order to chase more profits, the liquidity lets you do it on a smart selection basis, rather than being forced to "weather it out" during drawdowns.


I have no idea what "90% leveragability" means -- but it sounds suspiciously like going to 90% margin in your retirement account. Not something to boast about, IHMO.

Okay, here's the statistics for S&P500 B&H and IUL, 0/12 (floor/cap), 1% expenses, 1950 to 2013, all rolling 20-year periods.
	S&P		IUL
Avg 10.8% 6.2%
Min 6.2% 4.8%
Max 17.8% 8.0%
Med 11.0% 6.1%

The S&P performance is *better* than the IUL. The worst case is better. The average/median case is better. The best case is better.

To repeat, The worse cast is better. Even the worst case is better. Since the worst case is better, the risk is NOT greater.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72329 of 74759
Subject: Re: Hi gang... wow!!! Date: 5/31/2013 1:21 AM
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Digging deeper into the data, I believe that I see the reasons why the IUL underperforms a simple buy-and-hold long-term.
Data is S&P500 actual prices, 1950 to 2013, all rolling 1-year (12-month) periods.

1) The action of the floor and cap.
With no floor or cap the median annual return: 9.2%
With 0% floor, no cap: 10.4%
With no floor, 12% cap: 7.3%

The floor improved the return by 1.2% (10.4 - 9.2). This is the averted loss.
The cap cut the return by 1.9% (9.2 - 7.3). This is the foregone gain.

The cap hurts more than the floor helps. The cost of the cap is 1.9. The benefit of the floor is 1.2.
You're paying 1.9% but getting only 1.2% of benefit.

2) The IUL expenses/fees.
Median return, no Annual fee: 8.0%
Median return, 0.75% Annual fee: 7.2%
Median return, 1% Annual fee: 7.0%
Median return, 1.5% Annual fee: 6.4%
(All with 0% floor, 12% cap)

3) The exclusion of dividends.
To get an idea of the effect of dividends, consider this...
The median annual return of the S&P500 excluding dividends: 9.3%
The median annual return of the S&P500 with reinvested dividends: 12.4%

Over a 20 year period, this is a large monetary difference. Almost half of the total return is attributable to reinvested dividends.
At 12.4% $1,000 grows to $10,359. (w/divs)
At 9.3% to $5,921. (w/o divs)
At 7.0% to $3,870. (IUL @ 1% fees)

If an IUL did include dividends (on top of the 0%/12% floor&cap and 1% fee) the median annual return: 10.2%. This is adding the dividend after applying the floor/cap. If the dividend is added in and then the floor/cap applied, the return is significantly lower.
At 10.2% $1,000 grows to $6,976.

Of all these drags on performance, the largest is the exclusion of dividends. Over a long-ish period, that's an insurmountable headwind.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72540 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/10/2013 6:20 PM
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I just got back from 3 weeks in the Baltic and London, and was looking forward to seeing Dave's write-up showing his IUL data. And was disappointed to find nothing.
Darn.

Anyway .... to continue beating a dead horse .... I believe that early on Dave asked about 20-year withdrawal scenarios. Obviously, the scenarios of interest would be for *bad* times, because in good times the money never runs out.

Here are some figures for a one-time $100,000 deposit, then 20 years of withdrawing $417/mo. That's an SWR of 5%/yr, with no adjustment for inflation -- which is larger than the 4% that is typically bandied about. Items that are of interest are: final value, whether or not the account gets depleted, how many months the IUL account is bigger/smaller than the S&P500 B&H account, and the lowest account value.

Scenario 1: Jan 1981 to Jan 2001, encapsulating the 1981-82 bear market.
Accnt	Final Value		Lowest
B&H w/div $1,155,911 $78,686
IUL (loan) $185,161 $94,941
# IUL best 21 mo (9%)
# S&P best 219 mo (91%)

Scenario 2: Jan 1973 to Jan 1993, encapsulating the 1973-75 bear market.
Accnt	Final Value		Lowest
B&H w/div $325,832 $51,288
IUL (loan) $77,636 $66,904
# IUL best 96 mo (40%)
# S&P best 144 mo (60%)

Scenario 3: Jan 1993 to Jan 2013, the most-recent 20 years.
Accnt	Final Value		Lowest
B&H w/div $287,266 $98,801
IUL (loan) $107,556 $95,471
# IUL best 4 mo (2%)
# S&P best 236 mo (98%)


Scenario 2a: Jan 1973 to Jan 2003, 30 years of withdrawals.
Accnt	Final Value		Lowest
B&H w/div $729,110 $51,288
IUL (loan) $58,526 $58,526
# IUL best 96 mo (27%)
# S&P best 264 mo (73%)


Scenario 4: Jan 1975 to Jan 1995, 20 years not beginning with a bear.
Accnt	Final Value		Lowest
B&H w/div $1,022,318 $100,000
IUL (loan) $102,029 $88,069
# IUL best 0 mo (0%)
# S&P best 240 mo (100%)


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72541 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/10/2013 7:03 PM
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Rayvt writes,

I just got back from 3 weeks in the Baltic and London

I'm doing a Baltic cruise nest month. Did you visit St Petersburg? What did you see?

intercst

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72542 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/10/2013 7:47 PM
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Hi Ray,

Been uber busy myself... but this isn't forgotten.

I've actually worked out a much simpler way to run this apples-to-apples to account for the drawdown risks (which virtually everyone here says doesn't matter because they either have reserves to cover the drawdowns, or they can afford the losses because they'll make it up in further working years.)

It should be a really simple adjustment to your existing work (which I can't express my appreciation enough for your carrying that mail... thanks a thousand times over!)

Anyway... if I may beg just a bit more patience...
It will be eye-opening & very much worth it.

Dave Donhoff
Leverage Planner

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72543 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/10/2013 8:34 PM
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I'm doing a Baltic cruise nest month. Did you visit St Petersburg? What did you see?

Oh yes, oh yes, oh yes! We saw just about everything. The busiest 2 days we've ever had.

Cancel your ship tour and book the 2-day Grand tour for $300pp with http://alla-tour.com/tours/. Our bus was a 16-person minibus, not the 50+ person giant coach that the ships use. Plus we got a ride on the hydrofoil to Peterhof, but the ship tours went there by bus.
We also booked the evening Russian folkloric show. Very good, much better than what the ship had. That day we left the ship at 9AM and didn't get back until almost 10 PM.

We also booked their Stockholm/Vasa tour. 8 people on our bus there.

A warning note: there is little opportunity to go to the bathroom in St. Pete, and when there is the line is very long. The entire Hermitage Museum had 2 (two) bathrooms, and about 5,000 tourists. Both mens room had 1 stall and 1 standup. I guess Lenin decreed that nobody should waste time going potty. ;-)
So learn to hold it, don't drink or eat a lot, and go potty every chance you get.

Take a few Walmart plastic bags with you -- you can get great buys on souvenirs, postcard, & books from street vendors, but they don't have bags.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72544 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/10/2013 9:24 PM
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Thanks Rayvt. Excellent advice.

I found this photo of a Russian 'Toilet Bus"

http://merrymegsyeurope2011.blogspot.com.au/2011/05/toilet-b...

intercst

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Author: FlyingDiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72545 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/10/2013 9:59 PM
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Cancel your ship tour and book the 2-day Grand tour for $300pp with http://alla-tour.com/tours/. Our bus was a 16-person minibus, not the 50+ person giant coach that the ships use. Plus we got a ride on the hydrofoil to Peterhof, but the ship tours went there by bus.

We used Alla last summer as well. I think we had 11 people total in a Sprinter van. We used the Cruise Critic sailing thread to organize a group ahead of time. Highly recommended.

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Author: vc83 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72546 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/11/2013 5:49 AM
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We took that same cruise with a similar tour two years ago. It was terrific and I highly recommend the smaller tour. If you can swing it, the tour company offers an even smaller group of about 10 people. It allows for a lot of flexibility in your itinerary, depending on what is of most interest to those in the group.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72549 of 74759
Subject: Re: Hi gang... wow!!! Date: 7/11/2013 9:20 AM
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One more.
Scenario 5: Jan 1973 to Jan 1993 (20 years growth after a one-time $100,000 deposit, no monthly deposits or withdrawals), then 20 years of withdrawals of $1,500/mo (Jan 1993 to Jan 2013).
Accnt	Final Value		Lowest	Lowest in W/D phase
B&H w/div $3,309,640 $57,321 $833,301
IUL (loan) $116,083 $98,229 $107,363
IUL (withdraw) $196,635 $98,229 $195,211
# IUL best 81 mo (17%)
# S&P best 399 mo (83%)
TTL withdrawn -$360,000


Scenario 6: Same as #5, but withdrawal increasing by 2% a year for inflation.
Accnt	Final Value		Lowest	Lowest in W/D phase
B&H w/div $3,199,080 $57,321 $833,301
IUL (loan) -$755* -$3,222* $0
IUL (withdraw) $90,613 $91,930 $90,613
# IUL best 81 mo (17%)
# S&P best 399 mo (83%)
TTL withdrawn -$437,353


(*) Loan balance reaches 90% of account balance on July 2009, and 100% in May 2012.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72803 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/13/2013 10:21 AM
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It should be a really simple adjustment to your existing work (which I can't express my appreciation enough for your carrying that mail... thanks a thousand times over!)

Anyway... if I may beg just a bit more patience...
It will be eye-opening & very much worth it.


Now two months later and the simple adjustment has not been made. I guess good things come to people who wait.

I'll write your response so you can just cut and paste.

"I didn't know anyone was still interested. I'm busy right now but I should be able to post something in the next two weeks."

PSU

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72810 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/13/2013 6:19 PM
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Hi PSU,

Here's where Ray's spreadsheet fails, and you can take it & adjust to fit;
It doesn't account for the *RELATIVE* drag on returns of drawdowns (the costs of volatility.)

WHY IT MATTERS;
Markets rise & fall... but that's not the only risks.
Personal situations rise and fall as well, and they're not well correllated.

When the markets fall (and you are in a naked, unadjusting buy & hold position, as used in Ray's spreadsheet,) and the individual's personal situation hits the fan simultaneously, they face the risk of ruin... if that level is breached, they're destitute; game over.

THUS... if the stated purpose of retirement investing is to achieve the point where safe, passive income supercedes the burn rate on a given cost of lifestyle... and success is determined by the approach that achieves this the fastest with the most certainty with *EQUAL* avoidance of risk of ruin... then 100% of all investible funds must be taken into account from inception.

If 2 people have $100,000 (whether its an immediate lump sum, or a projected accumulation of savings over a future period of time) that they cannot lose, assume one (#A) uses a fixed reset indexing (FRI) strategy, the other (#B) an S&P B&H approach.

The S&P has periodic drawdowns of at least 53% These cannot be waived away as insignificant risks to a naked buy & holder, and they cannot be waived away as insignificant because the drawdowns can be "waited out." Waiting out a drawdown is simply replenishing the principal from work earnings, which are already included in the initial principal calculation no matter how you slice it.

In order to invest $100,000 (all at once, *or* over time) in the S&P B&H approach with a guarantee you’ll never have less than $100,000 liquid cash, you must *also* have a side reserve account of (rounding down from 53%) $50,000 to fill the bucket during the drawdowns. That means you must actually have $150,000 of cash, in order to invest $100,000 safely, in an S&P B&H strategy. The initial volatility cost (VC) is the opportunity costs (lost returns) on the $50,000, which are then subtracted from the long term gains on the $100,000.

BUT IT GOES DEEPER… every dollar of gain that the $100,000 wins, must also be split… with 2/3 going to the ‘at risk’ S&P bucket, and 1/3 going to the “safety refill” bucket earning nothing, and compounding nothing. The 1/3 of every growth dollar that has to be reserved to the refill bucket, earning nothing, effectively reduces the compounding rate 1/3 as well.


IN CONTRAST, that means that, apples to apples… person #A actually has $150,000 to employ (not just $100,000, since #A doesn’t have to keep a fallow bucket to fill in when the market rapes him) and can put the full amount into an FRI strategy, compounding in full from day #1.

NOW we have a race….
Longterm naked S&P returns, including dividends, compounding on only 2/3 of the initial principal, plus 2/3 of the accruing gains…
VERSUS
7.5% annual average returns (from an available FRI index blend, see link below) compounding at 100% of initial principal, plus 100% of the accruing gains.

Run that out… the FRI strategy *virtually* always wins.
Add the tax advantages of an IUL, and the FRI strategy *100% ALWAYS WINS!*

Volatility Costs are simply defined as the Maximum Market Drawdown.

Volatility-adjusted real returns are defined as;
(Naked ‘Buy and Hold’ Rate of Return) times (1 – Drawdown %)

Example;
If S&P ‘all-in’ average return, with dividends, is 14%
S&P max drawdown is 53%

= 14% (1 – 53%)
= 14% (47%)
= 6.58%

(BY THE WAY, this formula works perfectly well for *ANY* objective investing system that can be backtested to a single or set of markets to determine the historical drawdown ratio.)

Even ignoring taxation, 6.58% volatility-adjusted returns succumb to 7.5% compounding untaxed in an IUL.

To anticipte those who say they do not have to set aside $50,000, because ‘they are young and can stomach the risks of drawdowns and wait it out.’

What they are *REALLY SAYING* is that they are holding their *FUTURE EARNINGS* as their 53% refill bucket. They are saying that if the market shaves their savings in half, they can afford to make zero on their future earnings while they are waiting to accumulate the amount of money that they lost to the market drawdowns.

So, you see… whether you are 80 years old, or 20 years old… either way, you have to pay the volatility piper.

The 20 year old who uses an FRI strategy can afford to put 100% of their accumulation capital to work today, and be assured that 100% of every future savings dollar will be earning and compounding positive gains every step along the way… instead of being used to recapture money lost to the markets in at-risk accounts.

Dave Donhoff
Leverage Planner


PPS.
To compare Ray's $10,000 lump sum, plus $100/month savings in an S&P B&H strategy requires $5,000 reserves, and sufficient income for an additional $50/month unrisked savings. That gives an FRI investor $15,000 lump sum to start, and $150/month contribution.

Here's a run out of an example for a 25 y.o. female saving $15k lump sum, plus $150/month, over 40 years for a 65th birthday target.
Net/net internal rate of return is 7.76%.
Untaxed

If, at retirement age 65, a person's lifestyle expenses (i.e. required income) are at a marginal tax rate of 25%, the tax-free 7.76% rate is a taxable equivalent of 10.34% net return rate in a naked S&P strategy.

It can be spent down using tax-free loans at a cost of 5.5%... so every dollar spent at retirement is still earning an average of close to a positive 2% credit, even after its spent.

I know some don't care about the actual bottom line, and want to know the details of how everyone else is getting rich off you... so here's the charge & expense breakout as well.

Enjoy!
https://dl.dropboxusercontent.com/u/8644020/2013-09-13%20TMF...

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72811 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/13/2013 8:07 PM
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Dave, the difference between you and Ray & Co. is that you assign a quantifiable real dollar value to the risk factor and Ray & Co. does not. Ray & Co. subscribes to the EGBOK (Everything Gonna Be OK) strategy of retirement planning and you don’t.

Good job, BTW.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72812 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/13/2013 8:12 PM
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Hi Cath,

Dave, the difference between you and Ray & Co. is that you assign a quantifiable real dollar value to the risk factor and Ray & Co. does not. Ray & Co. subscribes to the EGBOK (Everything Gonna Be OK) strategy of retirement planning and you don’t.

I don't know that's true... it implies the omission was intentional, and I'm not entirely sure that is the case. It took me a while before I sniffed it out... so if others who don't dwell in this as constantly as I do took longer, I don't think that would be egregious.

We'll see.
Dave Donhoff
Leverage Planner

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72813 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/13/2013 10:54 PM
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Dwdonhoff posts,

https://dl.dropboxusercontent.com/u/8644020/2013-09-13%20TMF...

Thanks for posting the "skim" on that insurance product.

If an investor captured all those fees and charges for their own account by eliminating the insurance company, and let it compound for a lifetime, there'd be enough to fund the retirement for a whole other person.

intercst

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72814 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 12:34 AM
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Hi intrcst,

If an investor captured all those fees and charges for their own account by eliminating the insurance company, and let it compound for a lifetime, there'd be enough to fund the retirement for a whole other person.
Not in a taxable spend-down environment they couldn't, but if they could structure the same FRI strategy in a Roth, and get sufficiently better hedge yields than the major institutions to beat the loan arbitrage, then they may be able to outperform the pros... sure.

The major advantage the insurance companies offer is new money can earn the old portfolio yields in their general account for the hedge safe leg. New money on a DIY basis gets 1/5 or less of that (1% versus 5-6%.)

You can stuff your dodged fees in a buy & hold strategy forever though, and come nowhere near the hedged FRI strategy.

Dave Donhoff
Leverage Planner

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72820 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 8:58 AM
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Dave, the difference between you and Ray & Co. is that you assign a quantifiable real dollar value to the risk factor and Ray & Co. does not. Ray & Co. subscribes to the EGBOK (Everything Gonna Be OK) strategy of retirement planning and you don’t.</>

Hush, dear, the adults are having a discussion.


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Author: zenbro Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72824 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 10:49 AM
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"In order to invest $100,000 (all at once, *or* over time) in the S&P B&H approach with a guarantee you’ll never have less than $100,000 liquid cash, you must *also* have a side reserve account of (rounding down from 53%) $50,000 to fill the bucket during the drawdowns. That means you must actually have $150,000 of cash, in order to invest $100,000 safely, in an S&P B&H strategy. The initial volatility cost (VC) is the opportunity costs (lost returns) on the $50,000, which are then subtracted from the long term gains on the $100,000."

-----------------------------------------------------

hi Dave, if I'm following you, you are saying that a retirement account
that is not annuitized needs to have an extra 50% set aside to protect
the individual from any market drops. By this same reasoning, does every company that sells annuities have a 50% set-aside for every dollar
(present and future) that it is contractually obligated to pay out ?

In the fractional-reserve banking system that we live in, I seriously doubt that this is the case :-)

I know the "Masters of the Universe" on Wall street think that they can
hedge any future risk to their advantage, but time after time they are proven wrong ! ( read "Hedge Hogs", for a disgusting case study of a
hedge gone terribly wrong )

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72825 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 12:34 PM
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Dave, thanks for the Policy sheet data. I'll have to read your long post carefully before commenting on that.

I'm not familiar reading a sheet like you posted, but trying to puzzle it out. Check me out.

Looks like the life insurance is $250,000 level term, with the premium increasing each year. BTW, I thought it cute that they ran the illustration out to age 120. ;-)

Cross-checking .... the insurance premium is $280 at age 50. That seems in the ballpark for a pure term policy.

Therefore the investment is not actually $1800 ($150/mo). It's $1520 ($127/mo) for the investment part and $280 for the life insurance.

Starting at age 67, the life insurance premium is LARGER than the $1800 deposit, so rather than adding to the investment, the investment is being drawn down to pay for the life insurance. Nonetheless, that's more-or-less okay. When you retire that's when you switch from accumulation to decumulation -- so that's the point at which you stop adding to the investment account and begin withdrawing from it.

This brings up the question of why a 67 year old would want to have life insurance at all. The purpose of life insurance is to replace the paycheck income in case somebody dies early, but once you've retired there is no paycheck and hence no income that needs to be replaced. But that's not really pertinent here.

Now, going back to look at age 50 ..... the total fees are $180 (premium charge + policy fee). Um, that's 10% -- TEN PERCENT -- of $1800. Or 12% of $1520. That seems like a lot.

Now, that's the fee as a percentage of the deposit, but we need to figure the fee as a percentage of the account value -- that's the definition of Expense Ratio.

Age 50, (NG)CV is $207,769. $180 is 9 BPS. Including the insurance, $460 is 22 BPS. True, life insurance is a separate issue and shouldn't really be included -- but it's an inextricable part of the IUL policy so you can't really exclude it. So logically, in order to compare like to like, you should add an insurance premium to the non-IUL S&P500 alternative -- even though nobody rational would keep life insurance after they retire.

So, anyway.... for IUL, age 50, E/R is 22bps. Or should we do the percentage of $460 to the death benefit amount of $457,769? I think not. The death benefit goes to the heirs not the insured, so the amount that belongs to the insured is the cash value.

Age 65. Retirement age. Fees $1595, CV $769,585. E/R = 21 bps.
Age 75. Fees $3796, CV $1,785,422. E/R = 21 bps.
Age 45. Fees $344, CV $130,325. E/R = 26 bps.

After paying $280 for life insurance and $180 for fees, the actual investment deposit is $1340 ($112/mo). To be fair, you have to account for the life insurance premium for the (non-IUL) S&P500 alternative, so the amount invested in the S&P500 wouldn't be $150/mo either -- it would be $127.

There are some amusing things in the data. I chuckled at the thought of the 90 year old owner of a $6,000,000 account studiously making her annual $1800 deposit so she could keep her $250k life insurance in effect.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72826 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 1:26 PM
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Rayvt writes,

There are some amusing things in the data. I chuckled at the thought of the 90 year old owner of a $6,000,000 account studiously making her annual $1800 deposit so she could keep her $250k life insurance in effect.

</snip>


If you don't keep the life insurance policy in force, all loans taken against it to date become taxable with accrued interest and penalties -- a likely very large number.

intercst

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72827 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 1:52 PM
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If you don't keep the life insurance policy in force, all loans taken against it to date become taxable with accrued interest and penalties -- a likely very large number.

You've got to 'splain real slooooooow to Rayvt. These are new concepts to him.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72828 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 2:12 PM
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Dave wrote: The S&P has periodic drawdowns of at least 53%. These cannot be waived away as insignificant risks to a naked buy & holder, and they cannot be waived away as insignificant because the drawdowns can be "waited out." Waiting out a drawdown is simply replenishing the principal from work earnings, which are already included in the initial principal calculation no matter how you slice it. In order to invest $100,000 (all at once, *or* over time) in the S&P B&H approach with a guarantee you’ll never have less than $100,000 liquid cash, you must *also* have a side reserve account of (rounding down from 53%) $50,000 to fill the bucket during the drawdowns. That means you must actually have $150,000 of cash, in order to invest $100,000 safely, in an S&P B&H strategy.

My translation. The S&P has historically declined as much as 53%. This means that to preserve principal of $100,000, you'd need a reserve account of (rounding) $50,000.

But, Dave, the decline could be more or it could be less. And money is money, whether you call it "principal" or "reserves." So I don't see how having reserves of $50,000 makes putting your principal at risk more tolerable.

To me, it's a matter of how much risk can one tolerate. One strategy (S&P B&H) may allow you to end up with more money than the other strategy (insured account) but then again, maybe not. The older I get, the less risk I'm willing to bear. Knowing this about myself, I'd rather end up with less, but have it guaranteed, than bear the risk of a 50% (+/-) loss when I can least tolerate it.

By my calculations--which I still don't know how to post to this board--one would end up with more money with a S&P B&H, but not without a lot of risk of loss at an inopportune time that I'm unwilling to bear.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72829 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 2:37 PM
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Hi Zenbro,

hi Dave, if I'm following you, you are saying that a retirement account
that is not annuitized needs to have an extra 50% set aside to protect
the individual from any market drops.

*IF* they are riding an S&P buy & hold strategy, without market timing or hedging/trading, yes.

By this same reasoning, does every company that sells annuities have a 50% set-aside for every dollar (present and future) that it is contractually obligated to pay out ?
NO... good catch.

They are required, by law, to have 100 cents set aside for every dollar
(present and future) that it is contractually obligated to pay out. The stronger companies have higher obligation-covering reserves (as an example, I posted the illustration from Allianz, and they carry something like 106% to 108% coverage reserves.)

In the fractional-reserve banking system that we live in, I seriously doubt that this is the case :-)
You're thinking banking... the fractional reserve banking system is exponentially riskier than the statutory-reserve insurance system.

There is no law prohibiting the banks, or Wall Street securities firms, from voluntarily backing accounts as strongly as the full-reserve insurance industry... but why should they? They sell tons of stocks & mutuals with the customers assuming all the risk!

Dave Donhoff
Leverage Planner

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72830 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 2:58 PM
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intercst: If you don't keep the life insurance policy in force, all loans taken against it to date become taxable with accrued interest and penalties -- a likely very large number.

CC: You've got to 'splain real slooooooow to Rayvt. These are new concepts to him.


Hush, dear. Adults are trying to have a conversation.
intercst got it, you didn't.

A person who has a $6,000,000 account -- that's six million dollars -- has no financial reason to keep a life insurance policy for $250K. That's a round-off error that wouldn't even be noticed.

As intercst noted, one reason to keep it would be if dropping it would expose them to large taxes & penalties. Which wouldn't be the case here, because I only spoke of fees and expenses, with nary a mention of either cash value or loans.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72831 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 3:05 PM
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Hush, dear. Adults are trying to have a conversation.
Lord, I apologize for that there, and bless the starving pygmies in New Guinea.

CC, you do yourself a great disservice by trying to mock people. Not to mention that it falls flat on its face because you are attempting to mock facts or things that you have completely backwards.

You'd do much better off sticking to stuff like your post #72828 http://boards.fool.com/dave-wrote-the-sampp-has-periodic-dra... which has some serious and adult-level discussion.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72832 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 3:16 PM
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Still working on your long post, so can't comment on that yet.

A follow-on to my earlier post, using number from it:

Quick look at my spreadsheet as it is right now.

This illustration (that Dave posted the link to) says "average historical rates". Let's arbitrarily go back 50 years, to 1963, and run it from there. 26 + 50 = 76, which is a not untypical death age.
(BTW, I'm running the spreadsheet as I'm typing, so I don't know ahead of time how the figures will turn out.)

IUL, fee= 22 bps, 0% floor, 12% cap, initial $15,000, month addition $150
Value at end of 50 years (Jan 2013): $1,104,000

S&P500 B&H, E/R= 9 bps, initial $15,000, month addition $135 ($1800 - 90 - 90 per yr), no deduction for life insurance.
Value at end of 50 years (Jan 2013): $3,280,000
.

Not really fair, since we've ignored life insurance. The premium starts at $49/yr (age 26) and goes to $1415/yr (age 65). The 25'th year (age 50) it is $280/yr, so let's use that as the average.

S&P500 B&H, initial $15,000, month addition $112 ($1800 - 90 - 90 - 280 per yr).
Value at end of 50 years (Jan 2013): $2,972,000

Note that this assumes no tax on dividends. With a 15% dividend tax the final value is $2,439,000


*********
Let's check for a 1973 start, just in time to get hit by the 1973-4 bear market -- it took 7 years for S&P500 to recover back to the Jan 1973 level.

IUL, fee= 22 bps, 0% floor, 12% cap, initial $15,000, month addition $150
Value at end of 40 years (Jan 2013): $586,000


S&P500 B&H, initial $15,000, month addition $112 ($1800 - 90 - 90 - 280 per yr).
Value at end of 40 years (Jan 2013): $1,215,000

*********
For the 1963 start, running 40 years (to Jan 2003)
IUL, fee= 22 bps, 0% floor, 12% cap, initial $15,000, month addition $150
Value at end of 40 years (Jan 2003): $559,000

S&P500 B&H, initial $15,000, month addition $112 ($1800 - 90 - 90 - 280 per yr).
Value at end of 40 years (Jan 2003): $1,509,000


The fee percentage for the IUL still troubles me. Some people might argue that the fee should be the percentage of the death benefit not the cash value. In that case, 22 bs is too high. Turns out that it doesn't matter. If the fee is only 5 bps, the final value is $590K -- only a minor improvement over the $559K at 22 bps.

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Author: spinning Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72835 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 3:45 PM
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Ray is running numbers with 100% S&P. Dave suggested a better comparison would be to have a 33% reserve and 66% invested in the market. This is similar to standard recommendations for asset allocation between stocks and bonds for long term retirement savings, where the goal of the bond portion it to reduce volatility at the price of reducing returns.

Ray, what do the numbers look like if you include a bond holding in addition to the S&P 500?

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72837 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 6:04 PM
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Ray is running numbers with 100% S&P. Dave suggested a better comparison would be to have a 33% reserve and 66% invested in the market.

That would be a worse comparison. IULs were flogged as a long term investment vehicle (long term meaning horizons like saving for college or retirement) that provide market returns without market risk.

Therefore, in order to evaluate that claim one must compare the performance of an IUL with the market over some long period of time. That is the relevant comparison. That's the claim we're examining. And it turns out, that claim is false. IULs don't provide anything close to market returns over those time periods. Not even close.

Worse, the supposed safety feature is an illusion. Even if a major draw down occurs at the worst possible time--like right before retirement--you still have more money with B&H than the IUL. Unless you think there is safety in having less money, that is.

Now the goal posts have moved radically from the original claims. It is no long term vehicle for things like retirement or college that provides market returns without market risk. Now a IUL is being touted a place where you can park money until you can find other things to invest in that are better, and/or for people who want to have a guarantee of $100,000 of liquid cash, etc. Honestly, I lost track of all the side conditions that have been added since the original claims. I think it is easiest just to back up and look at the original question.

Q: Is an IUL a good way to save for retirement or for college?

A: Yes. But only for people who don't actually intend to invest in the IUL itself, and/or wish to have vastly less money over their time frame.

I humbly submit, that's not very many people. For everyone else, IULs are horrifically bad investments that should be avoided in all circumstances.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72838 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 6:14 PM
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Therefore, in order to evaluate that claim one must compare the performance of an IUL with the market over some long period of time. That is the relevant comparison.

That's correct. And setting aside 53% reserves for the S&P isn't apples-to-apples, either.

The practical reality is that, dollar-for-dollar, over some long period of time for the S&P vs. a hypothetical IUL (they've been in existence for only about 20 years), the balance in the S&P account will be higher--depending, of course, where in the market cycle one pauses to compare.

But the S&P has the risk of being slaughtered from time to time and the IUL doesn't.

That's the question for the retirement planner. Would you rather earn less and have it be guaranteed, or would you rather take the chance, through the market's notorious ups and downs, that you'll earn more and that "more" will be there at the precise time you need it.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72839 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 7:03 PM
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CCinOC writes,

That's the question for the retirement planner. Would you rather earn less and have it be guaranteed, or would you rather take the chance, through the market's notorious ups and downs, that you'll earn more and that "more" will be there at the precise time you need it.

I can speak from experience on that one. I've been investing in the stock market since 1981 and seen several big drops starting from the one in 1987. I certainly feel a lot safer in retirement with more money and a portfolio so large that my annual withdrawal for living expenses is less than an insurance company would be taking from me in annual fees and expenses on an annuity.

intercst

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72840 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 7:18 PM
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Ray is running numbers with 100% S&P. Dave suggested a better comparison would be to have a 33% reserve and 66% invested in the market. This is similar to standard recommendations for asset allocation between stocks and bonds for long term retirement savings, where the goal of the bond portion it to reduce volatility at the price of reducing returns.

Ray, what do the numbers look like if you include a bond holding in addition to the S&P 500?


Well, the comparison I'm doing is S&P500 B&H compared to S&P500 with IUL rules, to compare like to like.
But, yes, I take your point. What I'd have to do is allow for different asset allocations. Right now it doesn't do that. But I have another spreadsheet which does -- except it handles only withdrawal. https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_Ca...
The technique is already done, I'd just need to incorporate it into this spreadsheet. Maybe a couple hours work, or less.

To do a quick SWAG right now:
Starting with $500K in Jan 1973, withdraw 4%/yr annual increase by CPI inflation. And remember that 1973 is a really bad time to start--so it's a good worst-case test.

The final (Jan 2013) account value is:
100% S&P, 0% T-bills:
$189,000 (But the account is headed for zero.) The Jan 2000 value was $1.5M

60% S&P, 40% T-bills:
$1,056,000. Jan 2000 value was $1.7M

66% S&P, 33% T-bills:
$1,263,000. Jan 2000 value was $1.9M

Same parameters, but Jan 1963 start, 40 year duration, ending value for Jan 2003:
100/0: $5,967,000 (Yup: Six million dollars.)

60/40: $3,260,000

66/33: $3,752,000

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Author: zenbro Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72841 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 7:22 PM
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"They are required, by law, to have 100 cents set aside for every dollar
(present and future) that it is contractually obligated to pay out. The stronger companies have higher obligation-covering reserves (as an example, I posted the illustration from Allianz, and they carry something like 106% to 108% coverage reserves.)"

-------------------------------------------------

Dave, my man ! Your response is the reason I am ALWAYS civil
and courteous on these boards. I did not know that they were
required by law to carry those reserves, and I stand corrected
in my assumption.

I appreciate the schooling you just gave me, in the not toooooo
distant future I will have to decide upon taking a pension or a
lump sum buyout. I know that a pension is nothing more than an
annuity, and I might be able to take the lump sum and purchase an
annuity on my own, that has a COLA built into it. My employers
plan has no inflation protection. I also have a 401k, and will
stay in the stock market with that, but I do want the guaranteed
monthly income that a pension or annuity offers.

Have a great weekend.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72842 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 7:28 PM
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The practical reality is that, dollar-for-dollar, over some long period of time for the S&P vs. a hypothetical IUL (they've been in existence for only about 20 years), the balance in the S&P account will be higher--depending, of course, where in the market cycle one pauses to compare.

But the S&P has the risk of being slaughtered from time to time and the IUL doesn't.


But historically, the only time that the slaughtered S&P is smaller than the IUL is if it happens in the early years. But in the early years: 1) the account values are quite small because they haven't had time to grow, and 2) the account value doesn't matter because you won't be withdrawing until many decades later.

An S&P account that got cut in half from $2M to $1M is *still* more than a never-drop IUL account worth $500K.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72843 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 7:48 PM
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Hi Ray,

Looks like the life insurance is $250,000 level term, with the premium increasing each year. BTW, I thought it cute that they ran the illustration out to age 120. ;-)
No, actually I solved for the 1st year minimum non-MEC death benefit allowed on the funds we are dumping in ($15k lump, plus $150/month.) That came to $810,334 in death benefit.

Then I blended it to be fulfilled by 80% increasing annual term, and 20% underlying base policy (basically full-fat 'whole life style' premium costs... but exploded out in unwrapped fees, and minimized to the thinnest amount Allianz allows, for performance.)

I ran that blend through year 7, which was the earliest point that Allianz' interpretation of IRS code formulas allowed me to drop the 80% term blend, and find the absolute lowest amount of remaining base coverage allowed, on an increasing basis, to keep the tax advantages in place. On the IRR report you can see in year 8 the combined DB dropping from $843k down to $286k, and then rising per IRS code from there, at the least amount required by the laws to keep the tax bene's in place.

Starting at age 67, the life insurance premium is LARGER than the $1800 deposit, so rather than adding to the investment, the investment is being drawn down to pay for the life insurance.

Actually, its at the end of age 68, beginning 69... but you got it. The growth yield is sufficient to cover the internal cost shortage, and still grow the account (and that never reverses.)

Nonetheless, that's more-or-less okay. When you retire that's when you switch from accumulation to decumulation -- so that's the point at which you stop adding to the investment account and begin withdrawing from it.
We'd turn off income premiums the year prior to turning on distributions. I didn't dial that into this illustration... just did a vanilla pay-in all the way to maturity (dirt nap.)

If we're looking to retire at 65, I'd turn off inbound premium at that point & turn on distribution age 66, either solving for maximum flat income out through maturity or a nominated age... or inflating income by a specified rate to maturity or named age.

This brings up the question of why a 67 year old would want to have life insurance at all.
They don't have to want life insurance... if they don't want the death benefit they can give it to charity.

The purpose of life insurance is to replace the paycheck income in case somebody dies early, but once you've retired there is no paycheck and hence no income that needs to be replaced. But that's not really pertinent here.
Not in this case. In this case the purpose of life insurance is to get the financial performance. Any death benefit that comes along with the deal is like a toy in the crackerjack box.

Now, going back to look at age 50 ..... the total fees are $180 (premium charge + policy fee). Um, that's 10% -- TEN PERCENT -- of $1800. Or 12% of $1520. That seems like a lot.
A. Compared to what? Even *INCLUDING* that hit, it outperforms the "near zero fee" buy & hold... what's more important, what you pay, or what you get?
B. Remember, the secret sauce to the FRI strategy when executed in an IUL is the new money returns on the safe leg at the seasoned portfolio rates of the company's general account. That's a 3-4% advantage every year that buys the higher returns on the options hedge than you could get on a DIY basis.
C. That $90 + $90 charge is the same regardless of account size... so just like with small mortgages, it *appears* as a much bigger percentage for smaller cases. Such is life... it still outperforms the alternatives, despite hauling that load.

So logically, in order to compare like to like, you should add an insurance premium to the non-IUL S&P500 alternative -- even though nobody rational would keep life insurance after they retire.
I know some IUL salespeople that do exactly that... but I don't see it as being necessary to handicap the naked strategy more than the natural volatility costs already do.

99% of the people who've had me set up IULs for them arrived certain they neither needed nor wanted any more death benefit than they already had. I've not changed their mind about that at all, and usually agree. They leave with funding performance that results in more death benefit anyway... but it's
toss away" death benefit... they *COULD* donate it to charity (but, interestingly... its usually the wife that ends up deciding its a pretty cool thing to keep.)

There are some amusing things in the data. I chuckled at the thought of the 90 year old owner of a $6,000,000 account studiously making her annual $1800 deposit so she could keep her $250k life insurance in effect.
Yeah... silly, I agree. I was trying to at least incrementally deliver on my word. I'll jump on & readjust at age 65 a bit later... still juggling a weekend with my kiddo.

Dave Donhoff
Leverage Planner

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72844 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 8:02 PM
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Hi Cath,

But, Dave, the decline could be more or it could be less.
True... all we know for *sure* is that the S&P has frequently peeled off 40-45%, and as deep as 53%. Prior to the 53% selloff, it had no history of ever dropping that far. Today it has no history of ever dropping 60% also (just like its previous lack of proof at 53%.)

You have to pick *some* level of realistic volatility expectation though. If you personally want to fade the S&P history & call it 45% of risk, I think that's aggressive but within reason. If you want to call it 25%, I'd say you're better off going to Vegas, at least you'd get free drinks for your risks.

And money is money, whether you call it "principal" or "reserves." So I don't see how having reserves of $50,000 makes putting your principal at risk more tolerable.
If you can't handle any risk of loss on any of your money... your choices are obvious & narrow. A naked S&P B&H isn't even in the vocabulary for a person like that.

To me, it's a matter of how much risk can one tolerate.
Assuming the point of financial management is to arrive at the point where your safe passive income completely displaces your personal employment income for the expenses of your chosen lifestyle... and you are hoping to achieve this point as many years as possible before you die....

Then you would have a zero tolerance for *relative* risk.

To put it another way;
Assume you have 3 accounts to choose from... all with longterm historical net returns of 10%
Account A has a historical drawdon of 50%
Account B has a historical drawdon of 20%
Account C has a historical drawdon of 0%

Which is preferrable?
Why?
How do you determine the *COST* difference between them?
(Because if you can't see that there is a difference in cost, you'll suffer.)

One strategy (S&P B&H) may allow you to end up with more money than the other strategy (insured account) but then again, maybe not.
Not. At least not over the averaging effects of time & laws of large numbers (meaning we're not only comparing various market periods for a single person... but various market periods for a significant population of similar persons, all with their own unique living vagaries.)

The older I get, the less risk I'm willing to bear. Knowing this about myself, I'd rather end up with less, but have it guaranteed, than bear the risk of a 50% (+/-) loss when I can least tolerate it.
Yes, this is a logical place to begin your understanding of risk management... from the point where you are not enticed to "cheat" by assuming you can recover by earning more money to make of for the costs of volatility.

By my calculations--which I still don't know how to post to this board--one would end up with more money with a S&P B&H, but not without a lot of risk of loss at an inopportune time that I'm unwilling to bear.
Nope... not in the current tax environment anyway.

Dave Donhoff
Leverage Planner

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72845 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 8:15 PM
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Hi Ray,
I'm responding post by post, without a big picture review... so please pardon me if something is getting reclarified unecessarily...

This illustration (that Dave posted the link to) says "average historical rates".
More granularly, this is an illustrated gross average rate of 8.7%, which is what the 3-index blend used in this IUL have performed at least 95% of all rolling 25 years periods over the past 100 years of history. Generally speaking, the longer the historical periods used, the higher the performance average (at, say, the 95% percentile.) Since we are solving for a 40 year accumulation, I would assume the 95% percentile on a 25 year periodic average is sufficiently conservative.

You would have to significantly expand your spreadsheet to duplicate the calcs, since its a specifically balanced blend of 3 indexes... but if you want to do that, I can get you the markets & blend ratios... you want?

You can then try a naked B&H on that blend, adjusted for historical volatility cost ratios, if you want.

I'm just assuming that we're focused on what the best bottom line is, though, yes?

Dave Donhoff
Leverage Planner

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72846 of 74759
Subject: Re: Hi gang... wow!!! Date: 9/14/2013 8:27 PM
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