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Hi Syke,

Your formula is fine for illustrating downside volatility and creating equal risk of drawdown for the starting balances, but doesn't credit the upside volatility and then needs to be adjusted every year.
Not until after the financial point of retirement has been achieved (the point where your safe spend down of principal and declining yield will cover all living expenses and contingencies until death.)

Prior to that point, there is no less risk to any dollar of gain. You cannot afford to lose anything prior to the point of financial retirement.

For example, as the S&P grows over the IUL value, the correction factor should get smaller and smaller until it gets to zero. That's a lot of extra karate that doesn't help decision making.
Zero extra karate. The point of financial retirement is a dollar figure factored by the years of life remaining when achieved (the earlier the higher the figure, etc.)

If you aren't there, every dollar of principal you lose to forced liquidation during a drawdown forces your point of retirement to extend further into the future.

From a strategy comparison standpoint, your correction factor isn't useful, because in real life you don't get extra money depending on which strategy you use. You can only use one or the other. You don't get the option of the IUL with a 50% bonus.
Right... thus, since you can't add, you have to subtract.
If the S&P requires a 50% safety reserve margin, you can only risk 2/3 of your capital, as the other 1/3 (50%) must sit safe.

If the IUL has no risk of forced liquidation during drawdown, you can 'risk' 100% of your capital, compounding from day one.

You have a certain amount of money to invest, that's it. No correction factor in real life.
Yes, you have no choice but to correct. The odds of a forced liquidation during drawdown cannot be escaped. If you (the aggregate of everyone taking the S&P risks) keep spinning the barrel, the chamber *WILL* take a bullet.

Even partial losses to the unlucky losers are usually a devastation event, just like a 'partial housefire. Most folks find that losing 50% of their nest egg to a market drawdown is a retirement killer (not just handicapper,) and if you don't save up enough to buy your retirement (enjoyable escape from employment) you cannot "rent it" as with a house.

When you take 2/3 of the best 40 year S&P including dividends,
It fails to the 40 year Allianz IUL performing as I designed.

Dave Donhoff
Leverage Planner
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