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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: of 76390  
Subject: Re: Rerun of Dave's IUL scenario Date: 4/9/2013 7:36 PM
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Now that the spreadsheet has gotten quite sophisticated, it is worthwhile to revisit Dave's original scenario.
This is a backtest of investing directly in the S&P500 vs. investing in the S&P500 index the way that an IUL (Indexed Universal Life) policy does.

[Revised: the dividend tax for S&P500 was incorrect in the previous post. The reported final values for B&H and SMA were too high. The IUL values didn't change. The ordering of the different methods didn't change.]

IUL parameters (all annual):
Floor: 0%
Cap: 12%
Fees: 0.75%
Policy loan interest rate: 6.0%
S&P methods pay 15% tax on dividends. No other taxes considered.

Note:
Starting dates are beginning of that month.
Ending dates are end of that month.

Accumulate and grow for 28 years, then withdraw for 10 years.
--------------------------------------------
Initial $10,000 deposit. Adding $100/mo
Start Jan-1975
Begin withdrawals Jan-2003
Withdraw $1,500/mo,

Final values (strategy, Net final value, ending date):
B&H w/div	$739,220	Dec 2012
10mSMA $542,018 Dec 2012
IUL (loan) $41,003 Dec 2012
IUL (withdraw) $48,506 Dec 2012

TTL withdraw -$180,000

--------------------------------------------
This run begins withdrawals at about the peak of a boom, so it
has money being withdrawn while the portfolio is being crushed.
You are taking money out of an ever-dwindling portfolio.
Start Mar-1971
Begin withdrawals Mar-1999 (just before the peak before the dot-com boom)
ending Mar-2009 (at the bottom of the financial crash)

Final values (strategy, Net final value, ending date):
B&H w/div	$381,645	Feb 2009
10mSMA $563,210 Feb 2009
IUL (loan) $28,576 Feb 2009
IUL (withdraw) $48,571 Feb 2009

TTL withdraw -$180,000

You can see the operation of the IUL's floor and cap. And how the policy loan effectively shifts them downward by the amount of the interest rate. You can also see the operation of the SMA.

--------------------------------------------
This run begins withdrawals right at the bottom of a crash.
Start Oct-1974
Begin withdrawals Oct-2002 (at the bottom the dot-com bust)

Final values (strategy, Net final value, ending date):
B&H w/div	$803,921	Sep 2012
10mSMA $552,171 Sep 2012
IUL (loan) $35,784 Sep 2012
IUL (withdraw) $45,355 Sep 2012

TTL withdraw -$180,000

Interesting .... The IUL (withdraw) rode out the crash quite well.

--------------------------------------------
A completely different time period.
Start Jan-1960
Begin withdrawals Jan-1988

Final values (strategy, Net final value, ending date):
B&H w/div	$799,394	Dec 1997
10mSMA $511,233 Dec 1997
IUL (loan) $17,752 Dec 1997
IUL (withdraw) -$1,446 Dec 1997

TTL withdraw -$180,000
Note that the IUL (withdraw) ran out of money.

---------------
Continuing this onward for another 10 years:
B&H w/div	$1,139,664	Dec 2007
10mSMA $760,994 Dec 2007
IUL (loan) -$203,566 Dec 2007
IUL (withdraw) -$244,881 Dec 2007

TTL withdraw -$360,000
Note that both the IUL methods ran out of money.

---------------
Continuing this onward to the present:
B&H w/div	$1,101,192	Dec 2012
10mSMA $783,284 Dec 2012
IUL (loan) -$417,559 Dec 2012
IUL (withdraw) -$413,353 Dec 2012

TTL withdraw -$450,000


-------------------------------------------------
-------------------------------------------------
Like the first scenario, but increasing the deposits and withdrawals with inflation.
Initial $10,000
Start Jan-1975
Adding $100/mo, increasing deposit by 3%/yr
Begin withdrawals Jan-2003
Withdraw $1,500/mo, increasing draw by 2.5%/yr

Final values (strategy, Net final value, ending date-end-of-month):
B&H w/div	$812,084	Dec 2012
10mSMA $621,589 Dec 2012
IUL (loan) $77,215 Dec 2012
IUL (withdraw) $85,407 Dec 2012

TTL withdraw -$201,661

-----------------------------------------------
A completely different time period, increasing the deposits and withdrawals with inflation.
Start Jan-1960
Begin withdrawals Jan-1988

Final values (strategy, Net final value, ending date):
B&H w/div	$1,024,273	Dec 1997
10mSMA $663,962 Dec 1997
IUL (loan) $58,654 Dec 1997
IUL (withdraw) $38,157 Dec 1997

TTL withdraw -$201,661



Final values (strategy, Net final value, ending date):
B&H w/div	$1,323,263	Dec 2012
10mSMA $938,028 Dec 2012
IUL (loan) -$536,942 Dec 2012
IUL (withdraw) -$522,760 Dec 2012

TTL withdraw -$614,840
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