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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 75383  
Subject: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/3/2013 10:57 PM
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[Rev 1, updated to use rolling 12-month returns, showing all anniversaries and the average. Using historical S&P500 dividend yields.
All the charts links have changed.]

Executive Summary
The time period under consideration had two bear market crashes, when the market had a 50% loss.
The IUL-type strategy avoided those crashes, but at the cost of delivering substantially less overall gain.
One test was run where the last 10 years had a $1500 monthly withdrawal. By coincidence, the start date for the withdrawals was at the bottom of the first crash. Even so, the IUL-type strategy had a lower return.

An alternative strategy was also tested, which uses a simple timing signal to move in and out of the S&P500. This strategy has less volatility than the S&P, but higher volatility than the IUL strategy. It delivered a better overall return than the IUL strategy.

The IUL-type strategy is claimed to deliver market-like performance without market risk. It does not. It does eliminate market risk, but it has nowhere near market performance -- except perhaps in the short-term.

After a suitable time to allow for comments & discussion, I will upload the spreadsheet for public access.
------------------------------------------
Here are the assumptions:
S&P500 index from 1/1/1975 to 1/1/2013.
This is a period of 38 years, or 456 months.
Useing actual historical dividend yields.

Secondarily, the 2nd half of this period is also computed.
7/1/1993 to 1/1/2013

Initial deposit (purchase) of $10,000
Subsequent deposit (purchase) of $100 each month. ($1,000 per month is much too high.)
That's a total of $55,600 over the 38 years.

The IUL-like rules are:
Index only, without dividends.
Floor of 0% annual return.
Cap of 12% annual return.
Annual fee: 0.00% (This is the most optimistic fee. A fee of 0.50% was distinctly worse.)

For the market-timed strategy, cash earned 1.0% interest when out of the market.

For the Sortino Ratio, the MAR is 3%.

No taxes are considered.
No trading fees are considered.

------------------------------------------------
Three strategies were compared.
1) Buy-and-hold of the S&P500 index, including dividends.

2) Market timing overlay on the S&P500 index, including dividends.
Each month, compute the 10-month simple moving average (SMA)
Buy when the S&P index is >= the SMA.
Sell when the S&P index is <3% below the SMA.
This turns out to be about 0.4 trades a year, with an average hold time of 715 days.

3) IUL-type modified annual returns.
If the S&P500 index return is < 0%, deliver 0% return. (0% floor)
If the S&P500 index return is > 12%, deliver 12% return. (12% cap)

Explantion of the below statistics.
CAGR = compound annual growth rate. Higher is better.
StDev = volatility of the returns. Lower is better.
MaxDD = maximum drawdown. The worst dollar loss from the 12-month high. Lower is better.
Sortino Ratio = a figure of merit, measures shortfalls of returns below the target MAR. Higher is better.
Initial to: The final value that the initial deposit (only) has grown to.
Final value: Final value including initial and monthly deposits and withdrawals (if any). Higher is better.

Note this: S&P500 B&H with and without dividends:

S&P B&H w/div
CAGR 11.5%
Initial to: $633,805
Final Val $639,431

S&P B&H *excluding* dividends
CAGR 8.3%
Initial to: $206,683
Final Val $208,021

Excluding the dividends cuts the final value considerably.
That's a large headwind for an index-only strategy to overcome.

The statistics of the three strategies.

CAGR 11.5%
StDev 15.3%
MaxDD -46%
Sortino 0.72
Initial to: $612,717
Final Val $1,115,940

10mSMA
CAGR 10.3%
StDev 12.1%
MaxDD -25%
Sortino 0.77
Initial to: $410,813
Final Val $859,269

IUL floor/cap
CAGR 6.9%
StDev 1.7%
MaxDD 0%
Sortino 11.49
Initial to: $123,904
Final Val $373,328

A sortino ratio of 11 is excellent. That's the result of having a 0% "no-loss" floor. The tradeoff is that the total return is substantially lower -- only 1/2 or 1/3rd of the other strategies.
Equity curve: See chart 1
http://i1131.photobucket.com/albums/m543/rayvt/chart-1_zpsfc...

Chart 5 is the same, except the scale is adjusted so that the period from Jan-1975 to Jan-1997 is more visible. The Oct-87 Black Monday crash is quite apparent. That was a -30% loss in just 3 months time.
http://i1131.photobucket.com/albums/m543/rayvt/chart-5_zps82...

Second half -- Jul-1993 to Jan-2013

S&P B&H w/div
Final Val $88,164

10mSMA
Final Val $102,287

IUL floor/cap
Final Val $85,589

Equity curve: See chart 2
http://i1131.photobucket.com/albums/m543/rayvt/chart-2_zps96...

For comparison, the full period with no monthly deposits:

S&P B&H w/div
Initial to: $612,717
Final Val $618,111

10mSMA
Initial to: $410,813
Final Val $414,077

IUL floor/cap
Initial to: $123,904
Final Val $145,546

Equity curve: See chart 3
http://i1131.photobucket.com/albums/m543/rayvt/chart-3_zps3c...

=================================================
A 28 year accumulation, $10,000 initial + $100/mo from Jan-1975 to Jan-2003, then withdrawing $1,500/mo beginning on Jan-2003.
This is an 10% annual withdrawal rate based on the IUL value on Jan-2003 ($181K), which is far higher the customary Safe Withdrawal Rate of 4%. However, see next section.

S&P B&H w/div
Final Val $858,200

10mSMA
Final Val $607,205

IUL floor/cap
Final Val $109,363

Equity curve: See chart 4
http://i1131.photobucket.com/albums/m543/rayvt/chart-4_zps92...

The customary Safe Withdrawal Rate of 4% is based on a 60/40 portfolio, and takes into account the volatility of the 60% stock allocation. An IUL has much lower volatility, so it should be able to sustain a higher withdrawal rate.
With a withdrawal of $2,500/mo, the IUL balance hit $0 (zero) about Sept-2011. At which time the B&H strategy balance was $655,000 and the 10mSMA strategy balance was $472,000.


=================================================
Chart 6 shows the IUL-type equity curves.
Every rolling point-to-point 12-month anniversary, the average of these, and the 1-month p-p. This clearly shows that a 12-month period is better than a one-month period.
http://i1131.photobucket.com/albums/m543/rayvt/chart-6_zpsb4...
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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: 71689 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 12:02 AM
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Just quick glancing at the equity curves, and I still see 2 things appearing inacurate;
a) The IUL has no zero years,
b) Neither (none) of the strategies reduce their balance in their final 10 spend-down years.

Are you missing something, or am I?
Dave

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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: 71690 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 1:46 AM
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I don't know if you're missing anything, Dave, but the parameters, what-ifs, definitions and machinations have gotten so complicated as to render a comparison (S&P500 vs. IUL) moot.

The practical reality is that an IUL...

~ Protects your principal from ALL market declines. (Zero is your hero.)
~ Pays a death benefit, in the event of your demise, to heirs in many multiples of your total contribution.
~ Charges fees far lower (.75-1.20%) than mutual funds, 401(k) and IRA (3-4%).
~ Offers certain policies with an unlimited upside (no caps); i.e. Allianz's proprietary blended index.
~ Ensures that ALL gains are protected.
~ Provides an "annual reset" to ensure that your account participates in periods of robust market appreciation.
~ Distributions are tax free.
~ In some states, IULs feature ABR (accelerated benefits rider) in the event of chronic, critical or terminal illness. (Not available in CA.)

Compare the above against trading naked in the S&P500. No contest, in my opinion, albeit we don't seem to be able to arrive at a simple comparison of percentage gains via back testing.

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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: 71691 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 2:22 AM
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Charges fees far lower (.75-1.20%) than mutual funds, 401(k) and IRA (3-4%).

I misspoke. The simple average expense ratio of equity funds (which measures the average expense ratio of all eqity funds offered in the market) was 143 basis points in 2011. The average expense ratio that equity fund shareholders actually paid (the asset-weighted average expense ratio across all equity funds) was considerably lower; just 79 basis points.

http://icifactbook.org/fb_ch5.html#mutual

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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: 71692 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 9:35 AM
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Pays a death benefit, in the event of your demise, to heirs in many multiples of your total contribution.

The strategy that Dave espoused earlier was keeping the minimum legal requirement for a death benefit. Is that legal minimum requirement really 'many multiples of your total contribution'?

Charges fees far lower (.75-1.20%) than mutual funds, 401(k) and IRA (3-4%).

My mutual fund, 401(k) and IRA fees are all at or below 1%, with most in the 0.2% range. My average fees on all my investments is about 0.3% That's significantly lower than 0.75% - 1.20%

Ensures that ALL gains are protected.

But doesn't include dividends in the gains, which, as Ray pointed out, is a significant part of the potential 'gain'

Compare the above against trading naked in the S&P500. No contest, in my opinion, albeit we don't seem to be able to arrive at a simple comparison of percentage gains via back testing.

If the figures RayVT posted are correct, I don't think I need a simple comparison of percentage gains via back testing. Looks to me like the S&P wins hands down.

And, for someone who advocates risk-taking when taking on debt (ARM vs. FRM), it does seem odd that you are so averse to taking on risk when you are trying to grow assets. On the other hand, you do sell these IULs, along with mortgages, right? So, every time that someone refinances their ARM with you (to lengthen their term to try to get the payment back down after rates eventually increase), you get a commission, and every time someone buys an IUL through you, you get a commission. Maybe not so odd why you are such a strong advocate for your strategies, then.

AJ

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71693 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 11:49 AM
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~ Protects your principal from ALL market declines. (Zero is your hero.)

For some of us, this is not necessarily a feature. I understand that I can get greater reward if I choose to take greater risk, and so limiting the risk would limit my reward, and that doesn't fit with my risk profile or my financial goals.

~ Pays a death benefit, in the event of your demise, to heirs in many multiples of your total contribution.

This is not a feature I would want and certainly not one I would be willing to pay for. I do realize that quite a number of people want to leave their heirs with a big inheritance, and so for them, insurance makes sense. But there is another population in which I fit that has no such intentions. My kids already know they should not expect to receive one penny from us when we die because we intend to spend it all, and they may or may not receive what is left. Instead, we already gave them their 'inheritance' in the form of fully paid college tuition, so this feature of the IUL is meaningless to me.

~ Ensures that ALL gains are protected.

Actually, it only ensures that the gains below the cap are protected. It still gives the insurance company everything above that cap, and the data seems to show that that can be significant.

That said, I do realize that the insurance company is in business to make a profit, and so their money has to come from somewhere. In this case, it comes from the dividends and growth above that cap.

Compare the above against trading naked in the S&P500.

There we go with those loaded terms again. I actually expect investing to be a bit of an up and down ride, and I am perfectly fine with that because the risk I am willing to take also means there is possibility of greater reward.

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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: 71694 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 11:55 AM
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Hi AJ,

If the figures RayVT posted are correct,
They're not, yet.

Looks to me like the S&P wins hands down.
It doesn't... the comparison hasn't been leveled yet.

What we are seeing so far, with inaccurate figures, is that if you are willing to lose up to 50% of your money but wait 10, 15, 20 years for recovery (or as long as it takes,) *then* you may end up better off in a naked S&P position.

If a 50% drawdown is acceptable, its easy enough for me to build that into the hedged model as well... but we haven't got that far in ironing out a reliable model on the simpler basics yet.

NOW... you then addressed Cath, and while I won't speak for her, I do take exception to some accusations (yes, I know... 'if the shoe doesn't fit, don't try to keep wearing it, etc... but I think this is worth addressing.)

And, for someone who advocates risk-taking when taking on debt (ARM vs. FRM), it does seem odd that you are so averse to taking on risk when you are trying to grow assets.
Properly structured, with existing reserves and future interest savings linked to the same interest rate markets as the ARM mortgage, the ARM is actually safer than a FRM. This requires no active trading, and has zero risks of "drawdown."

In contrast, a naked S&P position has a real historical 50% drawdown potential (if the future continues to rhyme with the past.)

On the other hand, you do sell these IULs, along with mortgages, right? So, every time that someone refinances their ARM with you (to lengthen their term to try to get the payment back down after rates eventually increase), you get a commission, and every time someone buys an IUL through you, you get a commission. Maybe not so odd why you are such a strong advocate for your strategies, then.

This is simply a sleazy ad hominem attack.

Yes, it is important to consider 'incentive biases' when looking at any surface-level strategy... but throwing that out as a smear *AFTER* the hood has been peeled back and the underlying mechanics are being micro-inspected & reviewed is simply low class.

c'mon... stay classy, please.

Dave Donhoff
Leverage Planner

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71697 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 1:35 PM
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Charges fees far lower (.75-1.20%) than mutual funds, 401(k) and IRA (3-4%).

I misspoke. The simple average expense ratio of equity funds (which measures the average expense ratio of all eqity funds offered in the market) was 143 basis points in 2011. The average expense ratio that equity fund shareholders actually paid (the asset-weighted average expense ratio across all equity funds) was considerably lower; just 79 basis points.


You're getting ripped off if you are paying mutual fund fees that high. Both Fidelity and Vanguard (and probably others) offer equity index funds with fees as low as 5 bps. There is no reason to pay more than that for an index fund.

And this by the way, is yet another example of why there is no substitute for doing your own due diligence. You can pay high fees for a mutual fund. But you don't have to. You need to be aware of the fees and check into them before you buy. It is in interesting exercise to see how much that 1% or even 0.5% extra friction will cost you over time. It turns out to be a surprisingly large amount.

While we're on the topic of fees and due diligence, someone previously mentioned the Allianz IUL. It has a 17% cap which certainly helps returns, but there is also a 5% commission. That's before the expenses, which include a month policy charge, monthly expense charge, and monthly insurance cost and except for the monthly policy charge ($7.50) and except for the policy charge they don't really tell how much those are. On top of that, there are surrender charges. Those are enormously high costs.

https://www.allianzlife.com/IIG/Content/Documents/Forms_And_...

Ray's spreadsheet is already complicated enough and I think clearly makes the point with no further additions. However, it appears to vastly underestimate the actual fees and costs of IUL. Which is to say, it vastly overestimates the performance.

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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: 71698 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 1:50 PM
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Hi sykesix,

While we're on the topic of fees and due diligence, someone previously mentioned the Allianz IUL. It has a 17% cap which certainly helps returns, but there is also a 5% commission.
That's one-time. How much is that 5% spread out over 20, 30, 40 years?

That's before the expenses, which include a month policy charge, monthly expense charge, and monthly insurance cost and except for the monthly policy charge ($7.50) and except for the policy charge they don't really tell how much those are.
Actually, they do. All expenses, fees & charges are completely detailed & disclosed on the designed illustration. Each different case design changes how the various expenses occur, so there is no 'one-size-fits-all' menu of fees to publish before design.

All considered, the average annual burden of fees is under 1% by year 20 or earlier. Depending on design efficiency, it can drop as low as 30 basis points over the lifetime average by year 30-ish.

On top of that, there are surrender charges. Those are enormously high costs.
An emergency liquidation during a 50% drop in the S&P is a hellova bigger surrender charge... and can happen unscheduled, unannounced, at any time... even 20 years *AFTER* the account was started.

IUL surrender charges are at their max on day one (generally 12-14%, tops,) and decline on a straightline basis to zero by year 10-15. Further, there is no reason to trigger a surrender charge in the vast majority of cases as both principal and gains are are available at a 90% of value basis via policy loans (at interest rates less than average annual gains.)

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: 71699 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 4:04 PM
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a) The IUL has no zero years,
It does. Maybe a little difficult to pick out, though.

The IUL lines perhaps need to be explained better. The blue diamonds are all the individual 12-month rolling periods, of all 12 anniversaries. The purple line is the 12-month average of all 12 of them. You can see that the diamonds are scattered, which is because the performance is slightly different depending on the anniversary month.

Chart 1. 1/2/2001 to 1/2/2003, IUL line is flat. Also 8/1/2008 to 3/1/2009. Actually, it's a slight rise in Chart1, of $100/mo in the purple line, due to the $100/mo deposit. It's hard to see because all the dots overlay each other there. And it's a slope of only $100/mo on a value of $180,000, so it doesn't really show up.

Ditto for Chart3 -- which is mis-titled, it's actually $0 monthly deposit. The 12-mo average is $73,728 from Oct-2000 to Aug-2003, even though the 12-month anniversary values range from $71,194 to $80,646.

b) Neither (none) of the strategies reduce their balance in their final 10 spend-down years.
Yes they do. Compare Chart 1 with Chart 4. Every line (Chart 4) has a downward slope after Jan-2003, when compared with Chart 1. The orange line (10mSMA) ends at $850K in chart 1 and $600K in chart 4.

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71700 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 4:04 PM
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That's one-time. How much is that 5% spread out over 20, 30, 40 years?

It is one time charge--each time the premium is paid. Let's fire up Excel and see how much that turns out to be over say, 20 years. This will just be super quick and dirty for illustration purposes. We'll assume the initial premium and each annual premium is $1000. Interest rate is 10% compounded annually. And for comparison, we do the same thing with values of $950 to reflect the 5% commission.

At the end of 20 years, the no-commission value is $69,730
The 5% commission value is $66,244. That's a difference of $3,486 over the period. Expressed as a percent that turns out to be...5%. So when we are talking about costs, I think it is reasonable to include commissions along with the management fees.

Just so we're not talking past each other, I was responding to Catherine's comment that mutual fund fees are higher than IUL fees. While that is possible in some cases, it is bad advice to make investment decisions upon because only an unsophisticated mutual fund investor would make the mistake of buying a high-fee fund. I'm sure you and I both agree that if you're not savvy enough to evaluate mutual funds, you shouldn't be buying IULs. So let's take the comment that IUL have lower fees than mutual funds right off the table.

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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: 71701 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 4:35 PM
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but the parameters, what-ifs, definitions and machinations have gotten so complicated as to render a comparison (S&P500 vs. IUL) moot.
The comparison is not moot at all. It *is* getting complicated. Largely because there are a lot of potential parameters.

I've been through this type of analysis & comparison before, on other proposed strategies. Invariably, the proponents keep kicking up dust and complaining that you neglected to take some important factor into account. And then when you incorporate the factors that they complained were missing -- they complain that it's too complex.

The practical reality is that an IUL...
This 8-bullet-point list is an example of what I mean by kicking up dust.

To take a few of them...
Pays a death benefit,
Geico quoted a 20 year level term life insurance for a 40 year old male for $400/yr. That's $500,000 death benefit. Cheap, and doesn't have any entanglements with your investment portfolio. And you don't have to worry about losing your insurance if you decide to liquidate the investment, or vice-versa.
A $1,000,000 policy is $725/yr.


~ Charges fees far lower (.75-1.20%) than mutual funds, 401(k) and IRA (3-4%).
Give me a break!
The expense ratio of SPY is 0.09%. That's NINE basis-points.
Fidelity Spartan is 10 bps.

blah blah blah


Compare the above against trading naked in the S&P500. No contest, in my opinion, albeit we don't seem to be able to arrive at a simple comparison of percentage gains via back testing.
Maybe you looked at the charts upside down??? I assuming you *did* look at them, right?

Because when I look at them, the IUL line is far far below the two S&P500 lines.
Not just a little bit below, where you have to squint to see the difference.
A lot bit below, as in $373,000 vs. off-the-top-of-the-chart-$1,116,000.
A little difference in that the "naked" "unhedged" S&P500 investment has a final value three (3) times larger that the IUL final value.
But then, maybe you're the type of person who doesn't mind leaving $743,000 on the table.

[More follows.]

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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: 71703 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 4:56 PM
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What we are seeing so far, with inaccurate figures,

The figures are accurate.
There may be errors in the methodology, but quick&dirty back-of-the-envelope checks out to be within a few percent. So it's pretty close.

Pending further examination by another set of eyes, of course.

... is that if you are willing to lose up to 50% of your money but wait 10, 15, 20 years for recovery (or as long as it takes,) *then* you may end up better off in a naked S&P position.

Same answer I just gave CC.
The S&P had TWO 50% drawdowns, and yet still ended up with a much higher final value. Even though the foolish S&P investor lost 50% of his money twice, and the IUL investor didn't ever lose any money (other than fees.)

If a 50% drawdown is acceptable, its easy enough for me to build that into the hedged model as well... but we haven't got that far in ironing out a reliable model on the simpler basics yet.
No particular need for you to develop a hedged model. An IUL is already complex enough --- no need to toss some kind of hedge on top of that and make it even *more* complex.

Hey, here's an idea. Let's put some search term into Google, or visit Mel Faber's site. Let's, maybe, try a naive little strategy that doesn't even involve options or bull or bear or whatever spreads. Let's try a simple little grade-school strategy of looking at the 10 month Simple Moving Average of the S&P500.
Or, heck, if we want to throw simple to the winds, we could even try a 200 day SMA. Which every stock quote web site already will show you--so many people like to look at it that it is a pre-programmed default.

And guess what? The maximum drawdown isn't 53% It's 26%.


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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: 71704 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 5:09 PM
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Properly structured, with existing reserves and future interest savings linked to the same interest rate markets as the ARM mortgage, the ARM is actually safer than a FRM. This requires no active trading, and has zero risks of "drawdown."

But it does have the risk of a significantly rising payment, i.e. 'payment shock'. And as we went through before http://boards.fool.com/frm-vs-arm-debate-29488726.aspx?sort=... 'proper structuring' requires either a signifcant amount of current reserves, or a significant investment each month in excess of the FRM payment. And if someone were to 'invest' the same amount (either current reserves or additional payment over the FRM payment), they could achieve roughly the same results, without having the risk of having a significant payment shock.

AJ

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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: 71705 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 5:21 PM
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Ray,

The IUL lines perhaps need to be explained better. The blue diamonds are all the individual 12-month rolling periods, of all 12 anniversaries. The purple line is the 12-month average of all 12 of them. You can see that the diamonds are scattered, which is because the performance is slightly different depending on the anniversary month.
Hmmm.... I suspect you might have overworked & overcomplicated yourself a bit.

On a simple annual point-to-point the opening day and anniversaries are the market data points. If the ultimate year's returns were 12%, then any principal balance in place from the initial anniversary gets a credit of the full 12%, and any subsequent mid-year contribution gets a pro-rated credit according to the portion of time in. So, if $1,000 got contributed 1 month after initiation, that money would be credited 11/12ths of 12%, or 11%. There are no rolling 'monthiversaries' in this design.

At the anniversary, all original principal, plus any accumulated growth to date, is considered principal going forward. The straight PTP IUL equity curve is more of an annualize upward zig-zag stair case, climbing to match the naked S&P to the cap, & sitting flat the entire year when the S&P drops.

What you've just built is a monthly dollar-cost-averaging feed-in, which is nice (it juices the overall growth a bit,) but its only available for lump sums parked in a "staging account" (which earns 8% while its waiting to feed into the IUL.)

Probably easier to back it off to just the simple annual point-to-point. Save your DCA code for later though... nice work ;~)

b) Neither (none) of the strategies reduce their balance in their final 10 spend-down years.
Yes they do. Compare Chart 1 with Chart 4. Every line (Chart 4) has a downward slope after Jan-2003, when compared with Chart 1. The orange line (10mSMA) ends at $850K in chart 1 and $600K in chart 4.


Ehhhh... what I want to solve for is the total income distribution over a 10 year drawdown in full. The naked position will do a straight liquidation, and the IUL will continue the 0/12 principal growth with a 5.3% interest loan distribution.

Don't worry about it... if you'll grant me the patience, I'll build this out as soon as I can... probably in a couple weeks. The data won't change, and we'll all be only slightly older ;~)

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: 71706 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 5:39 PM
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Hi AJ,

Re; 5 yr ARMs
But it does have the risk of a significantly rising payment, i.e. 'payment shock'
Not really... the accumulated interest & amortization savings versus the heavier 30 FRM, over 5 years, in a worst-case cataclismic scenario, with zero returns on these savings, means the borrower can use these savings to supplement the ARM payments and still have paid less on the 30 FRM for at least 7 years. When they get a merely moderate interest credit on their reserves & savings, the benefit point stretches out further to 9-10 years.

If reserves & savings grow at the same rate as the ARM index increases (pretty much a no-brainer,) and anything less that global thermonuclear meltdown occurs, the benefit period stretches out significantly further than that.

All that has to be kept in the perspective that the average home occupancy is 3-7 years (depending on region, according to NAR,) and 19 out of 20 mortgages are paid off due to sale or refinance by their 7th year (according to FannieMae.)

'proper structuring' requires either a signifcant amount of current reserves, or a significant investment each month in excess of the FRM payment.

Assumptions;
$250,000 purchase
$200,000 5 yr ARM @2.25% (vs 3.25% on a 30 FRM.. a 44% discount in interest costs,)
$25,000 HELOC @ 6% (No PMI)

$4,330 Gross Income
$3,887 take home income (after withholdings)
$1,212.42 housing (including 1.25% prop taxes & 0.3% hazard insurance)
$433 consumer payments ($28,800 credit card balances @ 18%)

That's a loan at 28/35 DTI ratios.

$10,000 reserves (x6 months of total lifestyle expenses,)
$2,251 monthly discretionary income

Capturing an average 6% tax free compounding rate on reserves & monthly savable income will have the borrowers owning a liquid cash account roughly equal to their post-amortization mortgage balance (and thereby debt-free) within 10 years... even if the ARM rates rise (along with the relative IUL returns that reflect rising caps from rising safe rates.)

No drawdowns.
No payment shocks.
Safety of liquidity maintained.

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: 71707 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 5:51 PM
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How much is that 5% spread out over 20, 30, 40 years?
Quite a lot, actually. Compounding over a period of several decades has a far more major effect than people generally realize. Human brains just aren't equipped to intuitively grasp compounding. Addition, yes. Multiplication, yes. Compounding, no.

The 5% fee is certain. The benefit of raising the cap from 12% to 17% is not.
Although, historically, the S&P hit the 12% cap 35% of the time, and hit the 17% cap only 17% of the time. So you do capture much more of the gains

I wonder, though, if that 17% is contractually guaranteed.

You & CC talk about a 12% cap, but the contracts I've looked at say stuff like this:
"The guaranteed minimum index cap is 3%."
"The company at its sole discretion will make the determination whether to declare an index cap above the guaranteed
minimum index cap of 3%. While the company has no specific formula for determining an index cap above the minimum index cap of
3%, we may consider various factors, including, but not limited to the yields available on the instruments in which we intend to invest the
proceeds from the contract, the costs of hedging our investments to meet our contractual obligations, regulatory and tax requirements,
sales commissions, administrative expenses, general economic trends and competitive factors." (Bolding in original).

That's a whole lot of words saying that the company will set the cap wherever they darned well feel like.
And I think they're trying to tell you that when their investments do bad and when their hedging costs go up, and when their payrolls and office expenses go up -- that they are going to reduce the cap.

What does *that* do to an IUL? You can talk about no drawdowns and guarantees, and no risks all you want, but you completely ignore the risk that the company can lower the cap at its sole discretion.

What effect would that have? I'm glad you asked. ;-)
IUL, 12% cap, $10,000 grows to $145,500

IUL, 6% cap, $10,000 grows to $46,800.
No, I didn't make a typo. Forty six thousand dollars.

But maybe they're not that brutal.
IUL, 10% cap, $10,000 grows to $104,500

Just a little tweak of the cap 2% down, from 12% to 10% cuts your final account value by ONE-THIRD.


And, so far, the spreadsheet didn't include any IUL fees. I still don't have a good handle on what those would realistically be. What with the way that Dave has said it can vary, though, my guess would be "high". I didn't want to do the work in my spreadsheet to allow for fees that varied over time, just a constant percentage.

But....let's go with CC's lower figure, 0.75% (annual).
* IUL, 12% cap, NO fee -- $10,000 grows to $145,500
* IUL, 12% cap, 0.75% fee -- $10,000 grows to $109,000
YIKES!

IUL, 12% cap, 1.00% fee -- $10,000 grows to $99,300

Let's make a fair full-boat comparison.
* IUL, 12% cap, 0.75% fee -- $10,000 grows to $109,000

* S&P500, B&H, 0.09% fee (SPY) -- $10,000 grows to $618,000 (and has a couple of horrendous 50% losses, all the way down to $300,000 before recovering.)

* S&P500, SMA timing, 0.12% fee (SPY with a full-service broker commission) -- $10,000 grows to $410,538 (and has a 20% loss down to $200,000 before recovering, and another 15% loss down to $340,000 before recovering.)


Y'know, I really hope I screwed up bad somewhere in my spreadsheet. Because if these figures are right, IULs are a much worse investment than I thought.

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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: 71708 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 6:18 PM
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$4,330 Gross Income
$3,887 take home income (after withholdings)
$1,212.42 housing (including 1.25% prop taxes & 0.3% hazard insurance)
$433 consumer payments ($28,800 credit card balances @ 18%)

That's a loan at 28/35 DTI ratios.

$10,000 reserves (x6 months of total lifestyle expenses,)
$2,251 monthly discretionary income


So, the expenses you provided.....

$1212 (housing)
$ 433 (consumer debt)

adds up to $1645 in debt payments. Take that from $3887, and you get $2242 in what you are calling 'discretionary' income. While you accounted for homeowner's insurance and property taxes, you didn't account for all those other expenses, like:

food
electricity/natural gas
water/sewer
trash
phone
medical co-pays/deductibles

much of which is not really 'discretionary'.

And the 'x6 reserves' that you are showing only cover the debt payments, not the 'lifestyle expenses'.

So, how much of the $2242 'discretionary' income are you assuming is put into savings?

AJ

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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: 71709 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 6:44 PM
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Hi Ray,

How much is that 5% spread out over 20, 30, 40 years?
Quite a lot, actually. Compounding over a period of several decades has a far more major effect than people generally realize.

It is true that a one-time 5% fee compounded forward grows large... but the 2-3% ongoing annual fees/costs required to get the same zero-floor market gains outside an IUL compound to dramatically more than the 5% one-time compounded.

If we're not going to compare feature apples-to-apples, why not just bury cash in a coffee can... its free *AND* safe?

I wonder, though, if that 17% is contractually guaranteed.
The 17% figure she's brought up at Allianz is on a blended index of several markets. The structured options have significantly lower premium costs and their internally hedged returns outperform the S&P options alone.

The caps are held as high as the markets force them. Every carrier is subject to;
a) attracting new business,
b) keeping as much cash value inside existing business,
c) avoiding lawsuits by an unhappy customer base declaring ungrounded unfair dealing.

Carriers *have* tried to bring existing books of established contracts down in caps below the competitive insutry norm, only to face an onslought of litigative hell... from which all of the industry has observed & learned. They play it as conservatively as they can, in general.

===============

AJ,

While you accounted for homeowner's insurance and property taxes, you didn't account for all those other expenses

You are right... I ballparked too quickly. This just happened to be numbers from a similar inquiry I had received yesterday, and I need to build it out. When I do, I'll bring it here.

The lifestyle expenses have to be accounted for.
The 18% savings by eliminating the consumer debt will add positive weight.
It will still result in the 5 yr ARM being superior I expect... but we'll see.

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: 71714 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 7:40 PM
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On a simple annual point-to-point the opening day and anniversaries are the market data points. If the ultimate year's returns were 12%, then any principal balance in place from the initial anniversary gets a credit of the full 12%,
Yes. That't the way I did it.

and any subsequent mid-year contribution gets a pro-rated credit according to the portion of time in.
I didn't do that. I just credited the entire year's worth of additional contributions all at once.
[Let me check... be right back....]
...
[I'm back.]
Yes. No prorated credit.
New value = (gain_factor * (old_value - expenses)) + all intra-year deposits.
I can change it to a better approximation. Assuming level additions, on average, full gain on the average annual additon balance is Close Enough. Adds to the complexity, though, so CC will scream. ;-)

Yup, it makes things a bit better. For $10,000 & $100/mo, ends with $351,300 instead of $343,700

At the anniversary, all original principal, plus any accumulated growth to date, is considered principal going forward. The straight PTP IUL equity curve is more of an annualize upward zig-zag stair case, climbing to match the naked S&P to the cap, & sitting flat the entire year when the S&P drops.

Yes. What "rolling 12-month" means is this:
Some people have a Jan anniversary. Some have Feb, some Mar, etc. With a large enough universe, 1/12 of the accounts will have their anniversary in each month.

Now, due to sheer happenstance and randomness in the market, sometimes a Jan account will pull ahead of a Feb account, and sometimes a Feb will pull ahead of a Jan. The amount an account ends up with is just a matter of the randomness of the way returns came. For example, the 12 accounts that began in each month of 1975 all started with $10,000. With no additions and no fees, here are their ending balances on the 2012 anniversary:

$146,544
$141,535
$143,212
$126,222
$126,961
$136,126
$146,907
$147,691
$146,309
$177,453
$160,764
$146,827

So Fred who started in Apr-1975 ends up with $126K and Sam who started in Oct-1975 ends up with $177K. That's a difference just due to randomness. If 9/11/01 had happened a month later, all the results would be shifted around.
Neither $126K nor $177K is the "true" final value. Rather, the "true" final value is somewhere in the range of those 12 numbers. The standard way to reduce a set of numbers to one number that represents the range is by taking the average.
The average of these is $145,546. And we can see that indeed that's a more representative number than 122 or 177, because most of the numbers are right around 146.

Whew!! That's what is meant by "rolling 12-month" figures. There are 12 threads through the calendar, one on each anniversary month. The representative value of each and every month is the average of the last value of each thread. IOW, the average of the last 12 months. Perhaps median would be better, but *nobody* understands median - except geeks.

Either that, or you draw the curve with a paintbrush instead of a pen. And then try to explain to a client that his account will be somewhere in that smear. ;-)

The straight PTP IUL equity curve is more of an annualize upward zig-zag stair case, climbing to match the naked S&P to the cap, & sitting flat the entire year when the S&P drops.
Yes. And that's just what the chart looks like. Except that I plotted just the datapoints without the lines between them, and all the same color. That would be be a big smear, since there'd be 12 plots that all lie very close to one another, and overlap one another.

Ehhhh... what I want to solve for is the total income distribution over a 10 year drawdown in full. The naked position will do a straight liquidation, and the IUL will continue the 0/12 principal growth with a 5.3% interest loan distribution.
Darn hard to do! Especially when there is such a big difference in value at the start of the distribution period. $639K (but realistically $424K, 'cause I'd use the SMA timing strategy) vs. $146K

But what is probably reasonable is something like the RMD rules for IRA distributions. Each year (month?) take 1/N of the current balance, where N is the number of years/months remaining. I should be able to do that easily. Just have to figure out how to show it (so it is understandable!) on a chart.
That's 28 years of accumulation followed by 10 years of deccumulation.

IUL will continue the 0/12 principal growth with a 5.3% interest loan distribution.
????? Homey don't do no loans. Arkansas hick, remember?
A withdrawal is a withdrawal no matter how you dress it up.

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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: 71716 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 8:04 PM
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No worries, Ray...
Like I said, I'll iron it out when I'm back from vacation.

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: 71717 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/4/2013 11:59 PM
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what I want to solve for is the total income distribution over a 10 year drawdown in full. The naked position will do a straight liquidation, and the IUL will continue the 0/12 principal growth

After thinking about it, I can't make any sense out of it.

Do people actually do this? Do a 10-year liquidation (or "income distribution")? Why?

Usually people in retirement want a more-or-less constant periodic monthly income stream to last their entire life expectancy -- or typically 25-30 years. I can't see many people wanting to do some method where the amount varies greatly depending on the growth (or lack thereof) in the investment account, and have it exhausted in 10 years.

Naively, the 1st year distribution would be 10% (1/10), the 2nd year 11% (1/9) of the balance, the 3rd year 12.5% (1/8), etc.

In the example, at the start of the 10 year drawdown period, 10mSMA account balance is $421K. In the IUL account balance is $184K.

All else being equal, the first will deliver a total distribution in the neighborhood of $421K, and the second will deliver about $184K.

Income of $42K per year is more than $18K per year. If the first loses 50% inthe first and never recovers, that would be $21K per year. Which is *still* more than $18K.

So what are we trying to determine? That in a very bad case the IUL would only be a little worse than the S&P, as opposed to much worse in the case that there isn't a bear market? Who cares? Worse is worse.

Also, in deccumulation, the 0% floor isn't really 0% anymore. With a 10% withdrawal rate, the effective floor is -10%, because that's how much your account will go down if the market has a loss.

But the cap is still 12%, so everything works against you. You face a maximum decline of -10% (0% floor minus 10% withdrawal), but the most you can grow is 2% (12% cap minus 10% withdrawal).

One -10% drop will wipe out five 2% increases. So basically the IUL will always steadily glide down to zero.

But the S&P delivers anywhere between 2 and 3 times the annual income. And the headroom on the high side isn't capped at 2% -- it goes all the way out to 30%+ (albeit with decreasing frequency at higher gains).

I already did the chart showing a constant $1500/mo draw. IUL is visible headed for zero, and the S&P account is still increasing.

----------------------------
But, okay, I can change the parameters to see what constant draw takes the account to zero on 12/31/2012.

For $10,000 initial deposit and $100/mo, IUL with 0/2; S&P 10mSMA:
Balance on 1/1/2002: IUL = $183,600 S&P500@10mSMA = $427,536

Fixed withdraw of $1,975/mo takes the IUL to zero.
120 mo @$1975 = $237,000.

Fixed withdraw of $4,630/mo takes the S&P500@10mSMA to zero.
120 mo @$4630 = $555,600.

$4,630 is greater than $1,975
$555,600 is greater than $237,000

I don't see any particular reason to go further, to be more exact. One is TWICE as good as the other -- and that's in a time-period with 2 large bear markets. What more would you want to know?

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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: 71718 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 12:32 AM
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Usually people in retirement want a more-or-less constant periodic monthly income stream to last their entire life expectancy -- or typically 25-30 years.

Then get an annuity.

Allianz' MasterDex X Annuity pays 6% (guaranteed for 10 years) on the income rider part that lasts as long as you do, with unlimited upside* on the annuity part.

https://www.allianzlife.com/IIG/Content/Documents/Forms_And_...

* Allianz' proprietary blended index is comprised of Dow Jones Industrial Average (35%), Barclays Capital U.S. Aggregate Bond Index (35%), Euro Stoxx 50 Index (20%) and Russell 2000 Index (10%).

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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: 71719 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 12:35 AM
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Hi Ray,

Do people actually do this? Do a 10-year liquidation (or "income distribution")? Why?
Sure. Some folks have other income ladder rungs maturing at various times.

What I'm looking to do is make sure our comparison *model* works, regardless of the particular period (and thereby sequence of data.)

I don't see any particular reason to go further, to be more exact. One is TWICE as good as the other -- and that's in a time-period with 2 large bear markets. What more would you want to know?
How it performs in other market periods & sequences. Besides, we still haven't levelled the comparison. Once we're solid I'll increase the drawdown tolerance on the IUL & turn up the reward potential to match your constraints.

Dave Donhoff
Leverage Planner

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71720 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 1:54 AM
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Usually people in retirement want a more-or-less constant periodic monthly income stream to last their entire life expectancy -- or typically 25-30 years.

Then get an annuity.

You've got to be sh*tting me.

This is the "Retirement Investing" board. Not the "I hate having money" board.

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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: 71723 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 11:27 AM
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Well, retirees who bought an immediate annuity just before the Great Recession are a lot happier than their friends who remained invested and saw their nest egg crack open.

There are several types of annuities, and there are good annuities and bad annuities, just like any other product or service one might buy. When I hear someone say they'd never buy another annuity because of the poor performance or high fees they experienced with an annuity they purchased, I have the same reaction I'd have if I heard someone say they'd never buy a car because they had a bad experience with a lemon they'd previously owned.

The annuities market is very mature, very competitive, and profit margins are thin, which is good for the consumer. Properly purchased Immediate annuities are a good way for middle class Americans to generate a reliable lifetime retirement income.

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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: 71724 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 11:39 AM
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Then get an annuity.
Okay, an annuity.
That's a plain vanilla Single Premium Immediate Annuity that doesn't depend on any-frigging-thing other than what's in the contract. Pays you exactly $X a month forever.

A four-page contract, like this one: http://www.brkdirect.com/SPIA/SamplePolicy.pdf

Not a 100+ page document filled with with turgid prose like:
If the index cap is 3% and the performance of the index is between 0% and 3%, the indexed account will be credited with the index growth amount of 0% through 3%. If the performance of the index is above 3%, the indexed account will be credited with the index
credit of 3%. The company at its sole discretion will make the determination whether to declare an index cap above the guaranteed
minimum index cap of 3%. While the company has no specific formula for determining an index cap above the minimum index cap of
3%, we may consider various factors, including, but not limited to the yields available on the instruments in which we intend to invest the
proceeds from the contract, the costs of hedging our investments to meet our contractual obligations, regulatory and tax requirements,
sales commissions, administrative expenses, general economic trends and competitive factors. For example, if the company, in its sole
discretion, declares an index cap of 8%, and the performance of the index is between 0% and 8%, the indexed account will be credited
with the index growth amount of 0% through 8%. In this case, if the performance of the index is above 8%, the indexed account will be
credited with the index credit of 8%. At any time, if the performance of the index is below 0%, the indexed account will be credited
with an index credit of 0%. Therefore, you are assuming the risk that an investment in this indexed account would offer no return.


You'd always be wondering just how you're getting screwed, 'cause you sure couldn't easily track how "Allianz' proprietary blended index comprised of Dow Jones Industrial Average (35%), Barclays Capital U.S. Aggregate Bond Index (35%), Euro Stoxx 50 Index (20%) and Russell 2000 Index (10%)" is performing. Not unless you were a rocket-scientist or something.

Hell, the SALES BROCHURE for that Allianz annuity is 4 times longer than the ENTIRE CONTACT for the Berkshire Hathaway Annuity.

And, y'know what? It's simple & straightforward. Perfectly clear.
I just pulled a quote from http://www.brkdirect.com/spia/EZQUOTE.ASP
For a male born in 1950, the SPIA costs you $199K and they give you $1,000/mo for as the rest of your life.


Somehow I suspect that something like this Berkshire annuity is not what you (Dave) have in mind.

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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: 71725 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 12:05 PM
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Further to my "absurd" comment about SPIA for reliable lifetime retirement income, here's an insightful article (with comnents) on this very topic.

http://www.advisorperspectives.com/newsletters12/Your_Client...

A consumer following an SWP [safe withdrawal plan] invests her assets at the start of retirement and withdraws funds over her lifetime. The key determinants of whether such a plan will succeed--meaning that the client will not outlive his funds--are the rate of return on the invested assets and the rate at which the consumer withdraws funds. By contrast, a retiree could instead purchase a SPIA from an insurance company and receive known payments for the rest of her life.
_____

Of course, Rayvt and sykesix would NEVER get a SPIA because (a) they're fortune tellers who know the future; (b) they have nerves of steel when the market crashes 50% and (c) they're religious about their investment/retirement strategy.

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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: 71726 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 12:08 PM
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And, y'know what? It's simple & straightforward. Perfectly clear.
I just pulled a quote from [Berkshire Hathaway]. For a male born in 1950, the SPIA costs you $199K and they give you $1,000/mo for the rest of your life.


Fine. (You sound like you just invented the concept.) I didn't say anything about WHERE or WHAT annuity to buy. I said, if you want guaranteed income, a SPIA is a reasonable way to get it.

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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: 71727 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 12:57 PM
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Somehow I suspect that something like this Berkshire annuity is not what you (Dave) have in mind.

Me??? No, SPIAs haven't been part of our conversation.
Dave

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71728 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 1:03 PM
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Of course, Rayvt and sykesix would NEVER get a SPIA because (a) they're fortune tellers who know the future; (b) they have nerves of steel when the market crashes 50% and (c) they're religious about their investment/retirement strategy.

Add to that d) I'm risk averse. The reasons why annuities are risky are virtually identical to why paying off your mortgage early is risky. Should you need your money at any point between now and the end of your life it will be difficult, if not impossible to access. And while you don't know what your rate of return will be with an annuity until you die, just as with a mortgage you are almost certainly better off in other investments. Intercst has a detailed and fascinating discussion on how to actually calculate the cost of SPIAs. Well worth bookmarking and reading again.

http://www.retireearlyhomepage.com/annuity_costs.html

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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: 71729 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 1:10 PM
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CCinOC analyzes,

The annuities market is very mature, very competitive, and profit margins are thin, which is good for the consumer. Properly purchased Immediate annuities are a good way for middle class Americans to generate a reliable lifetime retirement income.

</snip>


Yet the average person who buys a so-called "low-cost immediate life annuity" loses 20% to 30% of the purchase price to the insurance company's various fees, commissions and costs.

The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
http://retireearlyhomepage.com/annuity_costs.html


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: 71730 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 2:05 PM
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Actually, no. In some cases, the insurance company pays a bonus--to wit:

https://www.allianzlife.com/annuities/fixed_indexed_annuitie...

A 10% bonus on premium received in the first five contract years. To receive the bonus, you must hold this annuity in deferral for at least five contract years, then take annuity payments over a minimum of 10 years.

As I said, there are good and not-so-good annuities. Ol' intercst would rather you never buy a car again if you had ever bought a lemon.

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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: 71731 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 2:09 PM
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The reasons why annuities are risky are virtually identical to why paying off your mortgage early is risky. Should you need your money at any point between now and the end of your life it will be difficult, if not impossible to access.

Thanks for reminding forum readers that I advised putting every damn penny you have into an annuity.

Oh, that's right...I didn't say that.

Your religion is muddling your thinking, sykesix.

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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: 71732 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 2:11 PM
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Add to that d) I'm risk averse.

Well, that cancels out (b) then, doesn't it?

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Author: OverTheHump Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71733 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 3:48 PM
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Intercst, thanks for the information. I had no idea that SPIAs had such high defacto fees and expenses. This just further confirms my belief that annuities of all stripes are bad for retirees who still have enough sense to come in out of the rain.

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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: 71734 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 4:02 PM
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This just further confirms my belief that annuities of all stripes are bad for retirees who still have enough sense to come in out of the rain.

Yes, all retirees should definitely participate in the coming stock market surge. They should consider cashing out their annuities--even at a loss, if necessary--to do so.

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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: 71735 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 5:41 PM
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CCinOC writes,

<<<This just further confirms my belief that annuities of all stripes are bad for retirees who still have enough sense to come in out of the rain.>>>

Yes, all retirees should definitely participate in the coming stock market surge. They should consider cashing out their annuities--even at a loss, if necessary--to do so.

</snip>


Stock and bond prices go up and down, but the money you lose to fees, commissions and costs is gone forever. That's why it's best to minimize/eliminate the latter.


intercst
Fee & Commission Elimination 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: 71736 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 6:14 PM
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Of course, Rayvt and sykesix would NEVER get a SPIA because (a) they're fortune tellers who know the future; (b) they have nerves of steel when the market crashes 50% and (c) they're religious about their investment/retirement strategy.

CC, you start to make good points, but then you throw it all away and lose all credibility when you decide to start calling names. Stop. It's childish and says more about you than about the person(s) you are taunting.

And anyway, you are making stupid assumptions based on nothing. You have NO IDEA of what I feel about SPIAs. I don't recall ever saying anything about SPIA's other than to post quotes on some.


they have nerves of steel when the market crashes 50%
I'm beginning to wonder if you own a car. Do you panic when the gas gauge drops to half-empty or 3/4 empty?

Just because you panic when things don't go your way doesn't mean that everybody else does or should. Most experience investors in the market know that it goes up and down, and that it always goes back up after a large drop. You just have to make sure that you have adequate margin of safety and adequate resources & liquidity to skate over the down stretches.

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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: 71737 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 6:20 PM
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Fine. (You sound like you just invented the concept.) I didn't say anything about WHERE or WHAT annuity to buy. I said, if you want guaranteed income, a SPIA is a reasonable way to get it.

Get with the program.

I was responding to a post that Dave made, not you.

(Yeah, I shouldn't be so rude. It's easy to get confused about which post somebody is responding to.)

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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: 71738 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 6:32 PM
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Stock and bond prices go up and down,

Yes, stocks are bound to go up...Dow 30,000 here we come!...and then down, of course. Better hope you're not nearing retirement age when they go down.

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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: 71739 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 6:33 PM
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Oh, stop yourself, Rayvt, who has consistently mocked the very respectful participants in this discussion. You disgust me.

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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: 71740 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 6:34 PM
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(Yeah, I shouldn't be so rude. It's easy to get confused about which post somebody is responding to.)

That's right. You should not be. Apology accepted.

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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: 71741 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 6:49 PM
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Yes, all retirees should definitely participate in the coming stock market surge.
Yes, they should. They also should have participated in the 2003 surge, the 2009 surge, the 1982 surge, the 1984 surge, and the 1975 surge.

They should consider cashing out their annuities--even at a loss, if necessary--to do so.
No, that's silly. If they bought an immediate annuity as part of their asset allocation, they should stick to that allocation.
If they bought their annuity for no good reason other than a saleman taunted them and scared them -- well, they shouldn't have bought it in the first place.

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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: 71742 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 7:40 PM
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Are we ready to get past the vituperation?
I sure am.
I'm just in this for the money. I go wherever the number take me.
More money = good, less money = bad.

I'll get my emotional jollies by watching a ball game. I'll get the excitement going by yelling at those kids to get off my lawn.

===============================================
I've been working on the subject that Dave brought up -- deccumulation or planned systematic withdrawals from the portfolio. Still don't have a good handle of what Dave's looking for, guess he'll explain it better when he gets back from vacation.

I kinda merged some of the scenarios that Dave & CC have mentioned, trying to get a better handle of a complete lifeline, and came up with this. A 30 year accumulation period was mentioned, with initial deposit and periodic monthly deposits. Also mentioned was a 10 year withdraw plan.
A ten year period seems too short, I'm more used to looking at 25-30 year periods.

What I came with was a 52 year scenario, 26 of accumulation followed by 26 of deccumulation. Dave seemed to be very interested in the total amount withdrawn, to the exclusion of factors that I usually think of a more important. But ... whatever. Different people have different interests.

The typical downdraw plan I'm accustomed to has an initial rate of X% of the beginning portfolio value, which is increased on each annual anniversary by inflation rate of the previous year. The initial rate is used ONLY to determine the 1st year withdrawal. After that, the draw is the dollar amount plus the inflation percentaqe.
The things that are of particular interest are: 1) the income provided by the draw, and 2) the ending final value after 25-30 years. Failure is defined as hitting a zero account balance.

Here's what I get for the 3 strategies:

52 year period, grow during first 26 years, then withdrawals for 26 years.
S&P500, $10,000 initial deposit, add $100/mo for 26 years, then begin withdrawing,
Starting at 5% (annual) of the 1/1/1986 value, increasing at rate of 2.5% each year for inflation.
Accumulating 1/1/1960 to 1/1/1986
Deccumulate 1/1/1986 thru 12/31/2012

Strat. Value at Init. Total Final Val *During withdraw period*
yr 26 (Mnth) W/D 12/31/2012 Lo Value Hi Value
B&H $230,900 $962 $437,600 $1,573,000 $231,000 $1,658,000
SMA $208,400 $868 $395,000 $1,250,000 $209,000 $1,297,000
IUL $115,000 $479 $218,000 $210,000 $116,000 $271,000

Of course, this is just one specific market conditions -- the actual history of the 1960-2013 market. The results would be different with other market history.

The IUL has the lowest monthly draw and the lowest final value.
None of the strategies ever reached a low value that was close to zero.
The IUL paid out only half the income, both monthly and in toto, and had a only a fraction of the final value.

The monthly draw for the last (26'th) year was almost double the draw of the 1st year of the withdrawal phase (not shown here).

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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: 71743 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 8:41 PM
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Are we ready to get past the vituperation? I sure am.

Well, hallelujah. You have a high tolerance for it.

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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: 71744 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 8:44 PM
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Also mentioned was a 10 year withdraw plan. A ten year period seems too short, I'm more used to looking at 25-30 year periods.

What difference does withdrawal make? You either have enough money when you're ready to retire or you don't.

This is just a plain ol' horse race. Start at the starting gate, plot two investment strategies side-by-side for 30 years and see who ends up with more money at the end.

Easy peasy.

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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: 71745 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/5/2013 8:45 PM
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Of course, this is just one specific market conditions -- the actual history of the 1960-2013 market. The results would be different with other market history.

One can't pick your market conditions/history. You were born when you were born. Just go with the 1960-2013 period and be done with it.

Geez.

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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: 71746 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 9:56 AM
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Well, hallelujah. You have a high tolerance for it.

Could you stop with the snarky, sarcastic, one line comments? They contribute nothing to the discussion whatsoever.

-murray

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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: 71747 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 10:03 AM
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This is just a plain ol' horse race. Start at the starting gate, plot two investment strategies side-by-side for 30 years and see who ends up with more money at the end.

That's what I did in an earlier post: http://boards.fool.com/fwiw-i-did-my-own-simple-spreadsheet-...

A single $1000 investment would be worth $280k using the S&P, $90k with the caps.

Easy peasy.

I agree. I just wonder why you get so defensive when the results show better returns with a simple B&H?

-murray

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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: 71748 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 10:16 AM
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One can't pick your market conditions/history. You were born when you were born. Just go with the 1960-2013 period and be done with it.

I mostly agree with this. But one does need to consider the possibility that the actual history that one lived through may just have been extraordinarily lucky, and that someone born 10 year sooner or 10 years later would have vastly different results.
Like the George Michael song goes, "Turn a different corner and we never would have met."

That's why academic studies & papers like to run Monte-Carlo simulations.

I recall reading (perhaps in the Market Wizards book) about a guy who opened a large option position the day before Black Monday. And made several million dollars in 2 days. That's something you would exclude from a backtest even if it happened to you.

What difference does withdrawal make? You either have enough money when you're ready to retire or you don't.
Well, presumably you'll be using that "enough money" as income during retirement.
Regardless, some people like to know how the strategies compare during the deccumulation phase -- even if you personally don't care. Dave certainly seems to care a lot about it.


This is just a plain ol' horse race. Start at the starting gate, plot two investment strategies side-by-side for 30 years and see who ends up with more money at the end.

Heh!
$1,116,000 is more than $373,000.

It's more than $859,000, too. Which it turn is more than $373,000.

'course, different people have different tastes and different outlooks on volatility and drawdowns, but having $485,000 more money -- more than twice as much money -- well, that's something to think about.

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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: 71749 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 10:18 AM
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Please show your spreadsheet. I'm not going to take your word for it.

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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: 71750 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 10:19 AM
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Also, we're not using a "single investment" of $1,000 but an agreed ongoing investment of X.

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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: 71751 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 10:40 AM
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Please show your spreadsheet. I'm not going to take your word for it.

I didn't save it since it only took about ten or fifteen minutes to create. I can make another with whatever parameters you want. Just let me know.

Better yet, why don't you create your own? Easy peasy, right?

This discussion somewhat reminds me of the Lets Make a Deal question that most people get wrong (look it up if your not familiar). A coworker vehemently said the correct answer was wrong. Being a programmer, I asked home to write some logic to test it. It was only after he worked through the logic on his own that he came around to admitting his error.

The point is that it's easy for the mind to make incorrect logical deductions without fully analyzing the problem. You've made many broad statements about the benefits of different strategies without providing any specific historical results.

I suggest you create your own spreadsheet which will either open your eyes or provide a more valid argument to counter the data presented so far.

-murray

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Author: KluverBucy One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71752 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 12:52 PM
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Rayvt,

Thanks again for all of the work you are putting into this.

In regards to the draw down phase, I believe Dave may have some of following thoughts in mind (although I hate to make assumptions). I do not know how easy this will be to include in your spread sheet, but if you can, give it a try.

The "withdrawls" from the IUL account will most likely be taken as loans. Most IUL accounts allow you to take the loan at a fixed rate (I think somewhere around 6%). However, for the purpose of index crediting your balance does not decrease. So if you take a withdrawl/loan for a $1000, that $1000 will still be credited at the end of the year along with all your other funds with a gain of between 0 and 12% (the floor and cap). Of course, you have to pay the 6% interest on the loan, so that $1000 loan will result in your account balance decling by up to $60 if the index floor is hit or actually increase your account by up to $60 if the cap is hit.

In addition, loans from IULs are tax free. Depending on where your non-IUL S&P fund is (IRA, 401K, brokerage account, etc) you will be facing anywhere from about 15-40% taxes on withdrawls. So after considering taxes, withdrawing $650 from the IUL may be equivalent to withdrawing $1000 from your retirement account.

Now, I know that most people will would be paying closer to the 15% than the 40%. But, in my opinion, if IULs have a role, it is for high net worth individuals - people who are already maxing out their tax-deferred savings options and saving additional money in non-retirement accounts. These people will likely remain in a high tax bracket after retirement, where marginal rates on income from IRA distributions can be 39%, and even long term capital gains will be 20%.

And speaking of taxes, what about the taxes on the dividends that are being received from the S&P index? As of this year, they could be taxed at 20% (during the period of your test data, there were times when the taxes could have been significantly higher). Lastly, your SMA strategy would regularly be incuring captial gains taxes that would lower its overall performance.

I know the inclusion of taxes is difficult and obviously varies significantly from one individual to the next. But as I said earlier, if there is a role for IULs I suspect it is for those individuals in the top tax brackets.

Again thanks for your efforts

KB

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71753 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 3:33 PM
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Now, I know that most people will would be paying closer to the 15% than the 40%. But, in my opinion, if IULs have a role, it is for high net worth individuals - people who are already maxing out their tax-deferred savings options and saving additional money in non-retirement accounts. These people will likely remain in a high tax bracket after retirement, where marginal rates on income from IRA distributions can be 39%, and even long term capital gains will be 20%.

Taxes are a good question, and I think are about the last thing we need to look at to put this issue to bed. IULs have some tax advantages and we need to at least think about them, even if we can't calculate exactly what they might be.

However, I'm not quite sure I understand what you're saying. If we're assuming for a high income individual either strategy would take place outside an IRA (for the reasons you mentioned), then the S&P strategy withdrawals would be taxed at the long term capital gains rate, which is for our high income earner would be 23.8% next year (up from 15%).

23.8% is a lot bigger than the zero tax rate of the IUL withdrawals, but the outperformance of the S&P strategy so utterly crushes the IUL strategy that it doesn't matter. You are so vastly ahead of the IUL that the tax question simply don't affect the decision tree.

For a lower income earner (less than $450,000, married filing jointly--which is not a bad income!), the S&P withdrawals would be taxed 15% next year. Tax on the dividends I don't think will matter a whole lot because it is only 20% of 2.5%.

So, unless I'm missing something the IUL doesn't make sense for high income earners and definitely not for low income earners. Low income in this case being less than $450,000/year.

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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: 71754 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 4:17 PM
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The "withdrawls" from the IUL account will most likely be taken as loans. ... and ... and ...

Yeah. I know there are fancy ways to withdraw month from an IUL. But in my mind, a fancy withdrawal is just a withdrawal. But fancy. First off, too complicated for me to get my head around.

One thing I've learned is that if some technique or strategy is complicated and has a lot of moving parts --- it means that I'm gonna lose a lot of money. ;-(

From what I have read and been told, with IULs it is easily possible to run afoul of some IRS rule and face a huge tax bill.

what about the taxes on the dividends that are being received from the S&P index? Lastly, your SMA strategy would regularly be incuring captial gains taxes that would lower its overall performance.

Correct. Accounting for that can be EXTREMELY complicated. And it all depends on each individual's specific tax situation.

My spreadsheet has a parameter for expense ratio for the S&P500. You could use that to approximate the losses due to taxes.

A lecturer once said something that has stuck in my brain for 40 years. "I'mm be happy if I have to pay $1,000,000 in income tax. Because that means I made $FOUR million."

Okay, here goes ... first time I've run this.
The S&P SMA strategy, $10,000 initial + $100/mo, 1975 to 2013.
Total deposit (basis): $55,600.

IUL with 0.70% fee --> final value $302,000

(Note: SPY E/R is 0.09%)
0.0% E/R --> final value $879,100.
1.0% E/R --> final value $683,600.
2.0% E/R --> final value $534,300.

B&H 0.10% E/R --> final value $1,112,000
LTCG = $1,056,000
20% tax = $211,200
Net after tax: $900,800

B&H 0.70% E/R --> final value $906,300

So the effect of LTCG tax is approximately the same as adding an additional 0.60% E/R.

That means for SMA strategy, after tax:
0.09% E/R + 0.60% slippage for taxes--> final value $738,600.

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Author: KluverBucy One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71755 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/6/2013 9:20 PM
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sykesix,

Thank you for your thoughtful reply.

You seem to agree with my premise - that if we are going to compare the 2 strategies, the mostly likely scenario is an IUL vs. a non-tax advantaged account. In that case, taxes would be at current LTCG of 23.8% and 20% for dividends. I am not intuitively good with numbers, but I suspect that this would significantly narrow the gap between the performance of the 2 strategies but leave the S&P index in the lead.

The last piece of the puzzle remains the fact that the IUL "distributions" are a loan and that the full account balance remains available for the crediting of any index gains. This of course means that the account balance may actually decline if the index gain is less than 6%, but will actually grow faster in any year that the index gains more than the interest rate on the loan. In contrast, funds withdrawn from the S&P B&H strategy are no longer available to generate positive returns. Frankly, I am dubious that this factor will be able to overcome the previous outperformance of that strategy, but I would love to see the numbers run.

Rayvt,

You are doing a wonderful job of proving your point but please don't slip into "hand waving away" valid questions. It is a fact that loans from an IUL are considered tax free and that the loan amount does not reduce the account value available for crediting. I have read multiple IULs' prospectuses and am comfortable with these facts. I still doubt that these 2 issues will result in the IUL outperforming the S&P B&H strategy but would like to see the numbers run (let me say again that this is the most wonderful real time exercise in finance that I have ever participated in, I am grateful for your efforts, and I realize that every request that I make means significant work for you).

I confess that the rest of your response quickly confused me. I am neither a financial professional nor a numbers guy and have no idea what E/R means - expense ratio??. But let's forget the SMA timing strategy and stick to the simple B&H - where taxes are only due on distributions and dividends are reduced by 20% for taxes. Given the tax implications of a worst case scenario, I would like to see how an IUL performs against the simple S&P B&H strategy - both during accumulation, and distribution assuming the tax free loan status and continual crediting of the loan amount. If you can do that, I swear that the next time I am in Arkansas, the beers are on me.

thanks again for all your work,
KB

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71756 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 1:44 AM
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KluverBucy,

[SNIP]IUL "distributions" are a loan and that the full account balance remains available for the crediting of any index gains. This of course means that the account balance may actually decline if the index gain is less than 6%, but will actually grow faster in any year that the index gains more than the interest rate on the loan.

Ok, so I retire on an IUL and start taking "loans." These loans owe some interest that accumulates every year, compounding.

When I die, what happens to the "balance?" Are the loans "paid" along with the accumulated and compounded interest?

I am positive these people are not giving away free money.

With the B&H, it transfers through inheritance but it sounds like using an IUL at the end is just going to shovel more money down the rabbit hole.

Just curious if we have some facts on this.

Gene

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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: 71757 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 2:06 AM
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I can make another [Excel spreadsheet] with whatever parameters you want. Just let me know.

Alrighty.

http://www.businesswire.com/news/home/20120726005911/en/Alli...

~ Starting balance in IUL and S&P of $10,000
~ Monthly contribution $1,000 to IUL and S&P
~ Monthly contributions to IUL and S&P from January 1965 (age 20) to January 2013
~ Cap on IUL = 11% (Allianz Life Pro+)
~ No losses in the IUL policy; floor = 2%
~ IUL annual reset locks in all credited interest each year
~ Monthly withdrawal of $5,000* from both from February 2013 (age 68) to December 2033 (age 88)

* In the case of the IUL, it won't really be a "withdrawal" but a loan at 5.3%. The entire IUL balance continues to accrue with no losses. Only the balance (minus withdrawals) in the S&P continues to appreciate (or not).

Which strategy runs out of money first?

Obviously, this question can't be answered because we don't know what the future performance of the S&P will be, but which strategy runs out of money first is the crux of this debate. Since the S&P is poised to correct (in my opinion), I wouldn't want my money in the S&P at this time. But that's just me.

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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: 71758 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 2:08 AM
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When I die, what happens to the "balance?"

It goes to your beneficiaries--tax-free.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71759 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 2:40 AM
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CC,

When I die, what happens to the "balance?"

It goes to your beneficiaries--tax-free.


But that wasn't the whole question.

What happens with the "loans" and the compounded interest you owe yourself against the supposed balance in the account?

How much is the amount paid reduced from the actual account balance? It was stated the distributions are loans. A 6% interest rate was mentioned and that the loans did not affect the account balance.

They do not give you that money for free. How is the debt repayment handled?

Gene

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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: 71760 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 3:39 AM
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Loans reduce the policy’s cash value and death benefit until repaid and also have loan interest that is payable annually on the total loan balance. So, the benefit payable to heirs can be fully restored if a loan is repaid but, until such time, a lesser death benefit is payable and interest is earned only on the net cash value.

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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: 71761 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 3:43 AM
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Here's another explanation.

http://www.youtube.com/watch?v=dJKHj3yfJDc

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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: 71762 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 9:33 AM
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~ No losses in the IUL policy; floor = 2%

What are the loads or annual fees for the IUL? Exactly how are those applied?

-murray

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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: 71763 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 9:36 AM
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So, CC, tell us again why you don't do your own spreadsheet? This is becoming more like religion, you seem more content with poking holes in everyone else's "science" rather than working on your own.

-murray

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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: 71764 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 9:41 AM
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What are the loads or annual fees for the IUL? Exactly how are those applied?

Ahh, I found it...sort of:

• Premium charge: A premium charge of 5% will be deducted as premium is paid into the policy.
• Monthly insurance cost charge: An insurance cost charge will be deducted every month on the monthly anniversary and is
based on factors such as age, gender, and risk class.
• Monthly policy charge: A policy charge of $7.50 per policy will be deducted every month on the monthly anniversary.
• Monthly expense charge: An expense charge will be deducted every month on the monthly anniversary and is based on
age, gender, death benefit amount, and risk class.


5% load on all money put in.

What, exactly, are the insurance costs and monthly expense charge??

-murray

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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: 71765 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 11:17 AM
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So, CC, tell us again why you don't do your own spreadsheet? This is becoming more like religion, you seem more content with poking holes in everyone else's "science" rather than working on your own.

Because you rudely demanded that I do so.

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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: 71766 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 11:37 AM
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So, CC, tell us again why you don't do your own spreadsheet? This is becoming more like religion, you seem more content with poking holes in everyone else's "science" rather than working on your own.

Because you rudely demanded that I do so.



Oh great. I just pee'd my pants!

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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: 71767 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 11:41 AM
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I am grateful for your efforts, and I realize that every request that I make means significant work for you).

That's how I learn things. On another site several years ago there was a similar debate about "Money Merge" plans to pay off your mortgage in 7-10 years. Full of moving parts and money flying about between accounts. It wasn't until somebody sat down and made a spreadsheet that it became clear what was going on, and that the way it "worked" was by double-counting money. Ever since then, I try to build a spreadsheet to help me understand a strategy.

This spreadsheet started out simple and has gotten quite complicated. But it's been fun developing it.
Once you'd got the basics down, especially if you made things a pluggable parameters, it's not too hard to add another tweak.

Yes E/R = expense ratio.

Same parameters as my last post:
The S&P SMA strategy, $10,000 initial + $100/mo, 1975 to 2013.
Total deposit (basis): $55,600.

IUL with 0.70% fee --> final value $302,000

B&H of S&P500
0.10 E/R, no taxes. ---> final value $1,112,100
0.10 E/R, 20% div tax ---> final value $1,094,100

The amount of dividend available to reinvest is only 80% of the divident received, so you lose the benefit of compounding.

The LTCG is $1,038,500
20% tax on that is $207,700.

So After-tax amount: $904,420

Of course, if it was all in an IRA, no tax on div, so the final value is $1,112,100.
Then you pay ordinary tax rate on withdrawal. Except if it's in a Roth.

Assuming you spread it out over 3 years, call it 33%.
So After-tax value: $734,000.

=====================================
Re-run with Accumulation ($10K initial + $100/mo) until 1/1/2003, then withdraw
$1500/mo until 1/1/2013. Increase draw by 2.5% each year.
20% tax on dividends, capgains tax on withdrawals paid out of pocket.
Total withdrawn: $201,700

IUL with 0.70% fee --> final value $29,800

B&H, 0.10 E/R, 20% div tax ---> final value $809,848
After LTCG tax this is a bit over $650,000

Yeah, you can structure the IUL so you pay essentially no taxes. BFD.
I'd rather pay $150K - $200K in taxes and have $650K after taxes than pay $0 tax and have $30K.

But sure as shoot, the guy with the IUL will crow about paying no taxes. ;-)

I'm looking forward to see what Dave comes up with. Who knows -- maybe I made some stupid mistake and all this is garbage.

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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: 71768 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 11:43 AM
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see how an IUL performs - both during accumulation, and distribution assuming the tax free loan status and continual crediting of the loan amount
Um .... forgot about this. Plain vanilla simple method is final value $29,800.

Need to figure accumulation of running balance minus outstanding loan minus 6% interest.
Let's assume we don't reduce the value by the draws, but keep track of the draw amount and the interest owed in a side account.
We'll let it grow, then at the end offset by subtracting the balance of this side account.

So play a game with the spreadsheet. Accumulation phase as before, to 1/1/2003, but then set withdrawal of $0 (this stops the deposits). See what final value is reported, and then subtract out the total amount of the side account.

SWAG on the loan interest. Avg balance of $100,850 (half of the total draw) at 6% per year = $6051/yr. Over 10 years that's $60,510.

Final SWAG'ed value: $286,500 - $201,700 - $60,510 = $24,300.
(Final value - total withdrawal - accumulated interest).

Oh, duh!! No need to SWAG -- excel is good at this kind of thing.
Ending balance of loan side account at 6% interest, computed monthly is $272,000. ($270,600 if computed annually.)

Final net value: $286,500 - $272,000 = $14,500.

Same ballpark as the plain Jane method, so all the fancy footwork with loans, etc. is just fancy-dancing with minimal real-world effect.


----------------------------------------
CC:
Also, we're not using a "single investment" of $1,000 but an agreed ongoing investment of X.
CC, what he did was a quick & dirty back-of-envelope smell test. Engineers & physicists do this all the time.
All you are trying to do is to see what ballpark the numbers are in. "Smell test" is like sniffing that lunchmeat in the refigerator --- you're not trying to get an exact freshness level -- you are just trying to see if it smells bad.

The value of this technique is that it is simple -- so simple that any methodology errors will be clearly obvious -- but that it will still give you a decent approximation to the results that have all the complexity. If the back-of-envelope number is way off from what you need it to be -- it smells and you know your idea is garbage, yo don't need to waste any more time & effort to be more exact.


Like he said, you can do this in 5 minutes. It's so simple that it would take as much time find it again after you've saved it as it would to just re-do it from scratch.

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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: 71769 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 12:09 PM
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~ Starting balance in IUL and S&P of $10,000
~ Monthly contribution $1,000 to IUL and S&P

I bypassed this earlier, but now that you've repeated it, I have to ask...
Do you realize how much this is??? Now absurd it sounds?
$1000/mo is $12,000/yr.

2013 - 1965 is 48 years. Total contribution is $576,000. Oh, plus the initial $10,000. $586,000.

Back of envelope figuring: Rule of 72 says 7.2% growth doubles every 10 years. Average S&P growth is close to 7.2%, so let's go with that. So we double about 5 times. Average balance is half of $586K or $293K. Double that 5 times = 32 times. 32 * $293K = about NINE MILLION dollars.

When figured accurately, the 1/1/2003 value of S&P500 B&H is $6,200,000.
SIX MILLION DOLLARS.

That's only back-of-envelope figuring. Details to come.

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71770 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 1:10 PM
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5% load on all money put in.

What, exactly, are the insurance costs and monthly expense charge??



Dave said those costs are roughly 150 bp which can then trail down to 70 bp or something as the account gets larger.

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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: 71771 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 1:46 PM
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Dave said those costs are roughly 150 bp which can then trail down to 70 bp or something as the account gets larger.

Is that on the total account value or the contributions?

-murray

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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: 71772 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 1:53 PM
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Because you rudely demanded that I do so.

I apologize if you took offense to my post, but I'm honestly curious why no one trying to defend IULs have posted any real historical analysis? As I said, it only takes a few minutes to download the data and throw in some formulas.

It makes it really difficult to take you seriously when you really have nothing to back up your stance beyond generalities.

-murray

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71773 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 3:27 PM
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Is that on the total account value or the contributions?

It is on the total account value. I believe Ray is using 0.7% for the fees. I had the same reaction as you when I saw that. They tell you the names of the fees, but they don't tell you how much they are or how they are calculated. Not good.

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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: 71774 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 4:01 PM
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See pages 26 through 29--notably 26 and 29--about fees.

http://www.slideshare.net/AlDeRemigis/indexed-universal-life...

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71775 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 4:37 PM
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See pages 26 through 29--notably 26 and 29--about fees.

http://www.slideshare.net/AlDeRemigis/indexed-universal-life......


Again they tell you the names of the fees, but they don't tell you how much they are (except for the monthly policy fee) or how they are calculated. They do tell you how they are applied, but we already knew that. In other words, they make very difficult for the consumer to figure out how much the fees are. I wonder why that is?

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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: 71776 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 5:04 PM
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See pages 26 through 29--notably 26 and 29--about fees.

OMG!! $115/mo for $100,000 life insurance.
Pull up some life insurance quotes from GEICO.

She can get a 30 year level term policy for $10.35/mo.
Or $1,000,000 for $42.63/mo.

No policy fees, or any of these other garbage fees.

Instead of $197.50 of her $400 going to investments, she could have
$389.65.

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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: 71777 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 5:22 PM
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[Note: I had a hard time believing some of these S&P500 final values. Didn't think they could be that high -- didn't pass the smell test.
So I cross-checked against VFINX, the Vanguard S&P500 index fund, with identical dates (1987-2013).
My spreadsheet figures came out very close to the VFINX figures, so I think the spreadsheet is indeed correct. Gain of 8.268 for VFINX vs. 8.377 for the spreadsheet].


Allianz Life Pro+ Fixed Index Universal Life Insurance
2% floor, 11% cap.
Ah, but with footnotes:
1) Cap ... will never be less than 2.50%
2) Annual floor ... will never be less than 1%.

Index is complex and includes bonds, so it will surely grow less than the S&P500. But ... whatever.

~ Monthly withdrawal of $5,000* from both from February 2013 (age 68) to December 2033 (age 88)
My crystal ball is in the shop. I'll have to stop at 1/1/2013

[*] as a side loan account accruing interest at 5.3%
[*] Constant $5000, no increase for inflation.

Allianz: 5% load on all money put in.
Plus Monthly insurance cost charge.
Plus Monthly expense charge.
Plus Monthly policy charge of $7.50.
What, exactly, are the insurance costs and monthly expense charge??


Arrgggghhhhh!
5% load is easy, just reduce the contribution (for the IUL only, not the S&P) by 5%, to $9500 initial and $950/mo.

The other expenses, who knows??? I'll just go with 1.5%.

S&P500 B&H has 0.09% E/R and pays 15% dividend tax.

===================================
Starting 1/1/1965, accumulate until 1/1/2013. Can't backtest deccumulation starting on 1/2/2013 because see above re: crystal ball / shop. But see later.

Initial $10,000 and add $1000/mo. IUL has load & fees as above.
On 1/1/2013:
S&P final balance: $12,003,000

IUL final balance: $2,789,000

One of these is not like the other. </deadpan>

===============================
Deccumulation...
Can't model the market performance from 2013 to 2033 (20 years), because, like, it's in the future.
But we can reasonably assume that the future will be similar to the past. So let's say that the 2013-2033 market will perform like the 1970-1990 market.

S&P B&H start $5000/mo withdrawal on 1/1/1970 with a starting balance of $12,003,000.
Final value 20 years later, 1/1/1990: $95,615,000 (not a typo).

Wow. Just wow. But we're talking about a withdrawal of $60,000/yr from a $12 million account. That's a withdrawal ratio of 0.5%, so it's almost negligible.

IUL, same parameters as before, starting balance of $2,789,000.
Final value: $5,627,000 (investment account) -$2,310,000 (loan account) = $3,317,000

Total withdrawals: $1,200,000 either way.

Three point three million is a big number.
Ninety five point who-cares million is a bigger number.

Oh, yeah, right. Taxes. If you get whacked by 50% tax (50% LTCG tax?? as if!), that's still $47 million left.

===========================
If you are wondering about how the S&P500 with SMA timing does:
Accumulation is $11,008,000 vs. B&H of $12,003,000.
So you get slightly lower growth but with much lower volatility.

====================
Now, 20 years of inflation is going to have a big effect on the buying power of that $5000/mo. Let's increase the withdrawal by 2.5% a year to compensate for inflation. The withdrawal in the last year is $14,100 per month.

Total withdrawn: $1,533,000

S&P B&H final value: $94,571,000

IUL, same parameters as before, starting balance of $2,789,000
Final value: $5,151,000 (investment account) - $2,811,000 (loan account) = $2,340,000

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Author: KluverBucy One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71778 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 5:33 PM
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Rayvt,

Nicely done and thank you for taking the time. Your case looks pretty darn solid. I will be interested to see Dave's response.

KB

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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: 71779 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 5:48 PM
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Deccumulation...Can't model the market performance from 2013 to 2033 (20 years), because, like, it's in the future. But we can reasonably assume that the future will be similar to the past. So let's say that the 2013-2033 market will perform like the 1970-1990 market.

That's reasonable. Now if you can manage to keep the snark to a minimum--a tall order for you, I realize--we can all learn more comfortably.

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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: 71780 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 6:05 PM
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MSN Money: Make a million with $225 a month

http://money.msn.com/mutual-fund/make-a-million-with-225-dol...

Consider these three ways to retire with $1 [one] million:

1. Invest $2,700 per year for 60 years, assuming an annual return of 5%.
2. Invest $14,500 per year for 30 years, assuming an annual return of 5%.
3. Invest $44,500 per year for 15 years, assuming an annual return of 5%.

How then can Rayvt's calculations [excerpted from his post] be accurate?

~ Starting 1/1/1965, accumulate until 1/1/2013
~ Initial $10,000 and add $1000/mo
~ S&P final balance: $12,003,000
~ S&P B&H start $5000/mo withdrawal on 1/1/1970 [just five years later] with a starting balance of $12,003,000.
~ Final value 20 years later, 1/1/1990: $95,615,000

Do we even need a spreadsheet to ask, "What's wrong with this picture?"

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71781 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 6:34 PM
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Do we even need a spreadsheet to ask, "What's wrong with this picture?"

<scratches head> I guess I'm not seeing the problem. My back of the envelope says that's about a 9.5-ish% average return over the period. That's almost exactly what you'd expect.

Specifically, what problem are you seeing?

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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: 71782 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 6:48 PM
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Time to do a back-of-envelope sanity check on my spreadsheet. Those numbers I recently posted seem too good to be true.

S&P500 spreadsheet growth calculations sanity check

S&P500 actual values.
Open 1/3/1950: 16.66
Close 12/31/2012: 1426.19

66 years.
16.66 growing at 7.32% compounded annually for 66 years = 1427.44
Therefore the approximate CAGR was 7.32%

$10,000 growing at 7.32% compounded annually for 66 years = $856,805

My backtest spreadsheet says:
B&H of S&P500 without dividends, no expenses
Initial value $10,000, $0/mo additions
Final value on 1/1/2013 = $836,475
The values are very close, only 2.3% difference.
Therefore, the spreadsheet calculations & formulas are correct.

We know that the historical average dividend yield of the S&P500 is around 3%, sometimes higher, sometimes lower.

Let's make a guess. Let's guess that the average yield from 1950 to 2013 was 3.5%.

Total average return is then 7.32% + 3.5% = 10.82%.

The number often bandied about is that the long-term average total return of the S&P500 is about 10.5% per year, so 10.82% is a reasonable estimate.

$10,000 growing at 10.82% compounded annually for 66 years = $6,470,580


My backtest spreadsheet says:
B&H of S&P500 with dividends,
Initial value $10,000, $0/mo additions, 0.09% E/R
Final value on 1/1/2013 = $6,747,890
The values are close, only 4% difference.
Therefore, the spreadsheet calculations & formulas are correct.

The spreadsheet passes the smell test.

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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: 71783 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 6:51 PM
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Now if you can manage to keep the snark to a minimum--a tall order for you, I realize--we can all learn more comfortably.

Dang!! I just pee'd my pants again.

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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: 71784 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 6:54 PM
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Specifically, what problem are you seeing?

I'm saying that $10,000 initial deposit + $1,000 per month over the period will not grow into $92 million.

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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: 71785 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 6:55 PM
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I just pee'd my pants again.

You need to change that diaper, for cryin' out loud.

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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: 71786 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 8:11 PM
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How then can Rayvt's calculations [excerpted from his post] be accurate?

~ Starting 1/1/1965, accumulate until 1/1/2013
~ Initial $10,000 and add $1000/mo
~ S&P final balance: $12,003,000
~ S&P B&H start $5000/mo withdrawal on 1/1/1970 [just five years later] with a starting balance of $12,003,000.
~ Final value 20 years later, 1/1/1990: $95,615,000

Do we even need a spreadsheet to ask, "What's wrong with this picture?"


That's where back-of-envelope sanity checks become useful.

Not sure what exactly you are questioning.
The difference between MSN's $1M and my figure? When you do compounding, the numbers explode rapidly as the rate goes up.
The " 1970 [just five years later]" balance of $12M?

This was a darn hard thing to try to model reasonably. The explanation is also maybe difficult to get across clearly.

It's really two different modelling runs.
Run 1) 48 year Accumulation phase from 1/65 to 1/13, starting value $10K and adding $1K/mo. The final value of that: $12,003,000

Run 2) 20 year Deccumulation phase, starting value $12,003,000 (the final value of the accum phase), withdrawing $5000/mo.

Now, what time period do we use for the deccum phase? Can't use 2013-2033 because that's the unknown future.
So pick *any* 20 year time span that we have actual historical data for. I picked 1970 at random, and because that excluded the dot-com boom which would arguably give over-optimistic results.
You could reasonably use any 20 year period you want, anywhere from 1950-1970 to 1993-2013.

Just change the dates in the spreadsheet. It's a bit of a pain, because I have to reset several parameters and then pick out the ending line from the middle of the spreadsheet, 20 years later.

But here goes: for 1960-1980 period:
S&P: $40,698,219

IUL: $4,922,518 - -$2,310,204 (loan) = $2,612,313

They are both lower than 1970-90.

-----------
Here, for 1980-2000 period:
S&P: $297,359,265

IUL: $7,867,082 -$2,310,204 (loan) = $5,556,877

They are both higher than 1970-90.

S&P went from 107.94 to 1469.25 (no dividends). That's 13.6 times.
$12M * 13.6 = $163M, so with dividends $297M sounds reasonable.

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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: 71787 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 8:55 PM
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Do we even need a spreadsheet to ask, "What's wrong with this picture?"

I'm beginning to think someone does not know how to operate a spreadsheet or even how to calculate time value of money.

(Not being snarky, just saying that requests to run numbers for yourself have been met with a brick wall and then this post)

Could you please tell us what data has convinced you that IULs are better investments in the long run? Your arguments are becoming less convincing by the hour.

-murray

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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: 71788 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 9:02 PM
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OMG!! $115/mo for $100,000 life insurance.

Wow! We're in year 13 of our 20 year, $500k policies that we each pay a bit over $300...per YEAR.

Frankly, we have little need for these policies now since we've been maxing out our 401ks since we both started work 25 years ago {shrug}

-murray

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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: 71789 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/7/2013 11:21 PM
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Could you please tell us what data has convinced you that IULs are better investments in the long run? Your arguments are becoming less convincing by the hour.

I have no friggin' "argument." I'm awaiting the conclusion just like everyone else, but I see no one--that's right, no one--providing convincing evidence that investing in the S&P 500 over a sustained period of time will result in a final figure of $92 million.

No one here has done it--obviously--but the "back of the envelope" must be a bazillionair by now.

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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: 71790 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:13 AM
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CC: I'm awaiting the conclusion just like everyone else, but I see no one--that's right, no one--providing convincing evidence that investing in the S&P 500 over a sustained period of time will result in a final figure of $92 million.

the "back of the envelope" must be a bazillionair by now.


MurrayS: I'm beginning to think someone does not know how to operate a spreadsheet or even how to calculate time value of money.

::sigh::
Quick & dirty back-of-envelope:

Annual Growth Rate: 10.5%
Col A is the deposit
Col B is the number of years for that deposit to grow
Col C is what that deposit grows to.

The Formula (column C)is =A7 * ((1 + B$4) ^ B7)
Where "7" is the row number of that row.

Cell B4 is the (constant) growth rate.

Deposit # yrs Grows to
$10,000 40 $542,614
$12,000 39 $589,264
$12,000 38 $533,271
$12,000 37 $482,598
$12,000 36 $436,740
$12,000 35 $395,240
$12,000 34 $357,683
$12,000 33 $323,695
$12,000 32 $292,937
$12,000 31 $265,101
$12,000 30 $239,911
$12,000 29 $217,114
$12,000 28 $196,483
$12,000 27 $177,813
$12,000 26 $160,916
$12,000 25 $145,626
$12,000 24 $131,788
$12,000 23 $119,265
$12,000 22 $107,932
$12,000 21 $97,676
$12,000 20 $88,395
$12,000 19 $79,995
$12,000 18 $72,394
$12,000 17 $65,515
$12,000 16 $59,289
$12,000 15 $53,656
$12,000 14 $48,557
$12,000 13 $43,943
$12,000 12 $39,768
$12,000 11 $35,989
$12,000 10 $32,569
$12,000 9 $29,474
$12,000 8 $26,673
$12,000 7 $24,139
$12,000 6 $21,845
$12,000 5 $19,769
$12,000 4 $17,891
$12,000 3 $16,191
$12,000 2 $14,652
$12,000 1 $13,260
Total $6,617,633

$6,617,633 20 $48,747,040


This is getting embarrassing.
Coming up with this spreadsheet took me less than 5 minutes.

*Grow each deposit by the number of years remaining in the 40 year accumulation period, then add them together.

* Grow that amount for the 20 year deccumulation period. Being a quick&dirty calculation, ignore the withdrawals. Withdrawal rate is $60,000/yr from a ~$7 million portfolio, which is negligible.

Is $48 million close enough to "bazillionaire" for you?

It's in the same order-of-magnitude as the more complete calculations, so it lends credibility.

========================
I'd like to see a response to Murray's question: Could you please tell us what data has convinced you that IULs are better investments in the long run?

Do you have any data, or is it just a gut feel and the attractiveness of the story (sales literature)?

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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: 71791 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:26 AM
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Is $48 million close enough to "bazillionaire" for you?

$48 million is not $92 million, as you first said.

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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: 71792 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:27 AM
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I have no friggin' "argument." I'm awaiting the conclusion just like everyone else, but I see no one--that's right, no one--providing convincing evidence that investing in the S&P 500 over a sustained period of time will result in a final figure of $92 million.

No one here has done it--obviously--but the "back of the envelope" must be a bazillionair by now.


So why don't you run the numbers yourself? You ask others to run the numbers for you and then throw it back saying you remain unconvinced. What more could we possibly provide to convince you?

Just to satisfy my curiosity, I ran them myself:

$10k initial, $12k added per year, 2% dividend. No taxes, no expenses.

Start 1/4/65, ending value on 1/2/13 = $8,622,136.90 (a bit less perhaps due to annual investments rather than monthly)

Start 1/4/60 with $8,622,136.90, take out $60k per year, ending value on 1/2/90 = $90,539,174.39 ... Certainly in the same ballpark which convinces me beyond any doubt whatsoever.

It took me longer to write that than it did to make the spreadsheet (from scratch) to do the calculations {shrug}

Simple question, do you believe IULs provide a better rate of return than buying into S&P? If so, can you provide something (anything) to back up your answer?

I'm beginning to wonder what your point is since it became muddled a hundred posts ago.

-murray

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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: 71793 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:40 AM
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$48 million is not $92 million, as you first said

{sigh}

If you took five minutes to read Ray's posts and had some basic knowledge of time value of money, you'd note that the original $92M grew for 30 years after accumulation while his followup post had a 20 year period after accumulation. (not sure if he did that on purpose or not)

Change the 20 to 30 years and you get $132,303,404.27 from $6.6M.

I guess that's not $92M either.

-murray

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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: 71796 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 11:23 AM
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I don't know what level of gazillionair I want to be: $48 million or $92 million or $132 million.

Imagine...all that from simply putting a grand a month into the S&P 500 over a few decades. No wonder Owebama wants to limit Americans' tax free accounts to $3 million. (He has always hated math.)

Owebama Budget to Take Aim at Wealthy IRAs
http://thehill.com/blogs/on-the-money/domestic-taxes/292071-...

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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: 71798 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:01 PM
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No wonder Owebama wants to limit Americans' tax free accounts to $3 million. (He has always hated math.)

Ok that post confirms some perceptions about you that I've developed reading most of your posts here. First you ignore all direct questions, call any criticism rude and now bring a political rant into a mostly civil discussion. It's obvious now that facts and logic aren't enough to change your already made up mind.

Tell me why I shouldn't put you on ignore?

-murray

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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: 71800 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:12 PM
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~ Starting balance in IUL and S&P of $10,000
~ Monthly contribution $1,000 to IUL and S&P

I bypassed this earlier, but now that you've repeated it, I have to ask...
Do you realize how much this is??? Now absurd it sounds?
$1000/mo is $12,000/yr.


It's especially ridiculous because the median family income in 1965 was only $6900, up about $310 from 1964, according to this information from the Census Bureau http://www2.census.gov/prod2/popscan/p60-049.pdf

But as one of my former managers who was really good in sales used to tell me - Don't let the facts get in the way.

AJ

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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: 71802 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:40 PM
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murray rants: Tell me why I shouldn't put you on ignore?

Oh, please...pleeeeeeze ...pretty please with sugar on top, put me on Ignore. I'll return the favor.

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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: 71804 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:45 PM
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Imagine...all that from simply putting a grand a month into the S&P 500 over a few decades.

Not so hard to imagine when at the starting point that you proposed putting 'a grand a month' into the S&P500, 'a grand a month' was 174% of the median family's income. That means, in order to invest 'a grand a month' and still live the lifestyle of the median family, the invesotor would have had to have been making 274% of the median family's inoome - and that's without considering the marginal tax rates at that time, which in 1965 were 90%. http://elsa.berkeley.edu/~saez/course/Labortaxes/taxableinco...

So in order to have 'a grand a month' to invest, the investor would have likely needed to be making 10 grand income a month over and above median family income, or a minimum of $126,900/year (assuming that the investor was willing to live the median family lifestyle) at a time when the median family income was $6900/year. That's 18.4 times the median family income. Someone making that income would likely already be considered 'a gazillionaire' in that time frame.

But I won't let the facts get in the way, because it's a great sales pitch.

AJ

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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: 71805 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 12:46 PM
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Oh, please...pleeeeeeze ...pretty please with sugar on top, put me on Ignore. I'll return the favor.

Probably the only advice I'll take from you...Ploink!

-murray

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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: 71809 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 1:31 PM
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Who said anything about "median family income?" We're talking about accumulating vast sums of money ($40-130 million), which can be done only if a relatively large amount--although $1,000 isn't such a huge amount for many people, including many on this board--is methodically invested.

The calculation we seek can't be done on the "back of the envelope." The calculation is a fairly sophisticated Monte Carlo simulation. I'll see if I can find one that addresses the precise issue we're discussing:

"How much would (1) a $10,000 initial contribution, (2) plus contributions of $1,000 per month, (3) from January 1, 1965 to December 31, 2012, (4) have yielded by investing solely in the S&P 500?"

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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: 71810 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 1:32 PM
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murray rants: Probably the only advice I'll take from you...Ploink!

Ahhh...me likey.

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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: 71813 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 1:59 PM
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"How much would (1) a $10,000 initial contribution, (2) plus contributions of $1,000 per month, (3) from January 1, 1965 to December 31, 2012, (4) have yielded by investing solely in the S&P 500?"

And the fact that this is a riduculous scenario for anyone to have actually implemented other than people who were 1%'ers in 1965 doesn't get in the way of the scenario. Like I said, it's a great sales pitch.

AJ

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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: 71814 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 2:05 PM
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The amount doesn't matter; we're using $10,000 and $1,000 as a round number. We just want to see if a systematic contribution to the S&P500 will yield in the millions and millions, as has been claimed here by Rayvt.

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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: 71815 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 2:35 PM
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The amount doesn't matter; we're using $10,000 and $1,000 as a round number.

Then why was your first response to me We're talking about accumulating vast sums of money ($40-130 million), which can be done only if a relatively large amount--although $1,000 isn't such a huge amount for many people, including many on this board--is methodically invested.?

My point was, in 1965, 'a grand a month' was a relatively large amount, and not something that that wasn't "such a huge amount for many people".

We just want to see if a systematic contribution to the S&P500 will yield in the millions and millions, as has been claimed here by Rayvt.

Rayvt posted spreadsheets and numbers that appear to be very believable to me, given the unrealistic scenario that was proposed. If you want to refute his information, I suggest that you post your own actual data, rather than trying to sell us all on your view without any data to back it up.

AJ

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71824 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 3:34 PM
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I don't know what level of gazillionair I want to be: $48 million or $92 million or $132 million.

Imagine...all that from simply putting a grand a month into the S&P 500 over a few decades. No wonder Owebama wants to limit Americans' tax free accounts to $3 million. (He has always hated math.)

Owebama Budget to Take Aim at Wealthy IRAs
http://thehill.com/blogs/on-the-money/domestic-taxes/292071-......


A proposal which on the face of it I heartily endorse. The caveat being they haven't said specifically how the cap would work. Presumably, you would have to remove money from the account down to the cap limit. If that's the case, it sounds very reasonable and common sense and certainly in keeping with the aims of an IRA.

The stated purpose of the IRA and 401(k) is to provide middle and lower class earners a chance to save for retirement. The way it works is the government provides a tax break (this is, a subsidy) to encourage these groups to save. The reason why there are contribution limits is these programs are not designed to subsidize high income taxpayers. High earners can use them, but they specifically designed to limit high income earners from sheltering money. This policy seems fair and reasonable to me. I presume this sounds reasonable to most people, because these rules have been basically the same since inception.

A tax break is identical to a subsidy. One party has more money, the other party has less. If you subsidize one group, someone else has to pay higher taxes in some form, or get fewer services or something. I don't see any national interest in subsidizing retirements for rich people. By definition they are doing fine, they don't need extra help from someone else.

Our current example would never work for an IRA. There is a $5500 per year contribution limit. So there is no way you make an initial deposit of $10,000 and then contribute $12,000. Which brings me to the next point. For most of the history of the IRA, the contribution limit has been under $2000/year. There's virtually no way an average investor gets to $3,000,000 without either being extraordinarily lucky or more much likely 2) gaming the system.

I do agree with subsidies to help middle and lower class people save for retirement. I don't agree with subsidies for people who game the system. This board shouldn't be a political board (there are plenty of those already) and note there's no politics in my post. Simply a discussion of the philosophy behind tax advantaged retirement accounts and why this proposal makes sense in regards to why retirement accounts were created in the first place.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71826 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 4:24 PM
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Our current example would never work for an IRA.

And that could be the solution.

Granted, the $1,000 per month from the beginning is laughable. Why not snap the beginning back to $1,000 per year. When IRAs begin (1976???), bring the lovel up to the IRA annual. Increase the amount in conjunction with the raises to the IRA limit.

That will give some more realistic bounds to the contributions.

Gene

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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: 71827 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 4:27 PM
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Owebama Budget to Take Aim at Wealthy IRAs
http://thehill.com/blogs/on-the-money/domestic-taxes/292071-.........

Under the plan, a taxpayer’s tax-preferred retirement account, like an IRA, could not finance more than $205,000 per year of retirement – or right around $3 million this year.

</snip>


The original IRA legislation had a 15% excise tax on IRA withdrawals in excess of $160,000/year. Texas "Senator from Enron" Phil Gramm had that provision removed in a late-night amendment to a tax bill in 1998.

IRAs were never meant to be a tax dodge for the wealthy. I'd prefer we claw back some of these loopholes for the rich & entitled before we start screwing middle-class folks with cuts to Medicare and Social Security.

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: 71828 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 4:35 PM
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Is $48 million close enough to "bazillionaire" for you?

$48 million is not $92 million, as you first said.


I can tell that you don't have an engineering background.

For quick&dirty back-of-envelope calculation, you are looking for the numbers to be within an order of magnitude.

48 and 92 are in the same order of magnitude.

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71829 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 4:42 PM
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And that could be the solution.

Granted, the $1,000 per month from the beginning is laughable. Why not snap the beginning back to $1,000 per year. When IRAs begin (1976???), bring the lovel up to the IRA annual. Increase the amount in conjunction with the raises to the IRA limit.

That will give some more realistic bounds to the contributions.


You'll have to ask Ray :)

But it doesn't matter. The supposed advantages of the IUL is that the withdrawals are tax free. So the "worst case" comparison would be an IUL vs. a regular taxable brokerage account. But even if you do that, buy and hold puts you so far ahead of the IUL the taxes are trivial compared to the gains.

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71831 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 4:49 PM
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Rayvt posted spreadsheets and numbers that appear to be very believable to me, given the unrealistic scenario that was proposed. If you want to refute his information, I suggest that you post your own actual data, rather than trying to sell us all on your view without any data to back it up.

The take home message is that if you want to be wealthy, invest unrealistic amounts of money. :)

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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: 71833 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:04 PM
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Granted, the $1,000 per month from the beginning is laughable. Why not snap the beginning back to $1,000 per year. When IRAs begin (1976???), bring the lovel up to the IRA annual. Increase the amount in conjunction with the raises to the IRA limit.

That will give some more realistic bounds to the contributions.

You'll have to ask Ray :)


I ran it with the amounts that CC asked for, even though the amounts were absurd. Alas, she then complained that the final values were absurdly high. Go figure. ::shrug::

Clearly she has never played around with compound growth over periods of several decades. Anybody that has knows how fast things go up at the end.
Doesn't seem she is familiar with the Rule of 72, either.
(I kinda had to snicker when she mentioned "sophisticated Monte Carlo simulation". As if.)


Anyway.................
The deposit amount is just one cell in the spreadsheet, so changing it is simple.
It does make sense to allow the periodic deposit to grow with time. I've already got that code for withdrawals, so it's simple to do it for deposits.

Anyway.....there was an error in my posted Allianz IUL figures, they were too low, which CC will be happy to hear. They are *still* way lower than B&H, though. Still sucks, just not as bad.

The spreadsheet is getting real close to being releaseable.

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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: 71834 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:08 PM
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Corrected Allianz backtest.
There was an error in my spreadsheet -- the IUL fee calculation took out too much. And IUL withdrawls were double-counted.

===================================
Starting 1/1/1965, accumulate until 1/1/2013.

Initial $10,000 and add $1000/mo. IUL has load & fees as above.
On 1/1/2013:
S&P final balance: $12,003,000

IUL final balance: $2,789,000 <<WRONG
IUL final balance: $2,852,000 <<Corrected

===============================
Deccumulation...

S&P B&H start $5000/mo withdrawal on 1/1/1970 with a starting balance of $12,003,000.
Final value 20 years later, 1/1/1990: $95,615,000 (not a typo).

IUL, same parameters as before, starting balance of $2,852,000. <<Corrected
Final value: $5,627,000 (investment account) -$2,310,000 (loan account) = $3,317,000 <<WRONG
Final value: $7,951,485 (investment account) -$2,127,897 (loan account) = $5,823,589 <<Corrected

Straight withdrawal, rather than loan-type withdrawal. << NEW
Final value: $5,797,317 << NEW

Total withdrawals: $1,200,000 either way.

====================
Now, 20 years of inflation is going to have a big effect on the buying power of that $5000/mo. Let's increase the withdrawal by 2.5% a year to compensate for inflation. The withdrawal in the last year is
$14,100 per month. <<WRONG
$7,993 per month. <<Corrected

Total withdrawn: $1,533,000

S&P B&H final value: $94,571,000

IUL, same parameters as before, starting balance of $2,852,000
Final value: $5,151,000 (investment account) - $2,811,000 (loan account) = $2,340,000 <<WRONG
Final value: $7,951,485 (investment account) - $2,603,415 (loan account) = $5,348,071 <<Corrected

Straight withdrawal, rather than loan-type withdrawal. << NEW
Final value: $5,309,883 << NEW

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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: 71835 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:31 PM
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If you want to refute his information, I suggest that you post your own actual data, rather than trying to sell us all on your view without any data to back it up.

I don't have a "view;" I'm just not willing to make a decision based on religion.

I do, however, refute Rayvt's calculations as wildly optimistic on their face.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71836 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:34 PM
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Rayvt,

First, thanks for all the time you put in this.

Anyway.................
The deposit amount is just one cell in the spreadsheet, so changing it is simple.
It does make sense to allow the periodic deposit to grow with time. I've already got that code for withdrawals, so it's simple to do it for deposits.


My thinking was the end result was so far beyond expectations, it was freaking-out some of the "number-challenged" people. Starting at a level more in line with reality and basing the contributions on a similar level will bring down the end numbers to a level they might get their heads around.

When you work with a short time frame or look only at future times, the approach used works fine. Once you hit 25 years or more, the compounding adds up pretty quickly.

Gene

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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: 71837 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:37 PM
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The stated purpose of the IRA and 401(k) is to provide middle and lower class earners a chance to save for retirement. The way it works is the government provides a tax break (this is, a subsidy) to encourage these groups to save.

Heaven help you if you prove to be exceptionally adroit on the accumulation side inside your IRA. Apparently that is verboten.

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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: 71838 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:57 PM
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I do, however, refute Rayvt's calculations as wildly optimistic on their face.

Because "math" is biased against you? Seriously, this isn't about being "optmistic", like math is a state of mind that one has an opinion about, this is about compounding over a sixty eight year period of time and making a calculation. If something earns, say, 8%, it doubles roughly every 9 years. Over 68 years, that's over 7.5 "doublings". One/two/four/eight/sixteen/thirty-two/sixty-four/somewhere between 64 and 128.

Yes, numbers get big. Amazing how that works.

Note that I'm not commenting at all about life insurance in any context, but solely on basic math as raised in this thread and your apparent denial of it.

-synchronicity

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71839 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 5:57 PM
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Heaven help you if you prove to be exceptionally adroit on the accumulation side inside your IRA. Apparently that is verboten.

Verboten according to who? As I understand the proposal, you would be required to take distributions down to $3MM. You'd get to keep the money, but the money would not longer compound tax free until withdrawal. So you'd lose the tax advantage designed for lower and middle income people--which you obviously aren't if you have that much money. In other words, the government doesn't seem interesting in subsidizing retirements for rich people. Let me ask this: Why do you, Catherine Coy, believe that rich people need your tax dollars more than you do?

And you'd have to be not only exceptionally adroit you'd almost have to be magical to get $3MM in an IRA. IRAs were created in 1974 and the contribution limit was $1500/year, which was raised to $2000 in the 1980s, and up to $5000/year in the 2000s. Those are not big amounts. I realize you personally will never be convinced to crack a spreadsheet or use a calculator, but you have to have fargin' amazing returns to get to $3MM, with contribution limits that low. That was by design.

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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: 71840 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 6:10 PM
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sixty eight year period of time and making a calculation.

Sixty eight years?! Who's math challenged now?

1965 to 2012 = 47

What a riot.

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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: 71841 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 6:14 PM
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Let me ask this: Why do you believe that rich people need your tax dollars more than you do?

They're not "tax dollars" to be spent (and wasted) merely because the government says so. They're MY dollars that I worked hard to accumulate.

That's the difference between libruls and conservatives: libruls think government ALLOWS its citizens to keep some of ITS money. Conservatives think it's their money to begin with and they of necessity must give some to the government to run the country.

Wow, this country is sooooo screwed up. Your belief system is why.

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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: 71842 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 6:19 PM
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sixty eight year period of time and making a calculation.

Sixty eight years?! Who's math challenged now?

1965 to 2012 = 47

What a riot.


You're forgetting about the 20 year drawdown period Ray added in, as well. Or was there too much math for you to bother reading his posts?

Plus, start to end of 1965 is one year, to end of 1966 is the two years, 1967 is 3, and so on. If you keep counting, you'd realize that by the time you read the end of 1977 you have 13 years, 1987 is 23, 1997 is 33, 2007 is 43, 2012 makes 48. It's 1/1/65 thru 12/31/12, so technically it's ONE DAY short of 48 years. Followed by 20 years of drawdowns per Ray.

So 48 plus 20 equals 68.

Are you sure you want to keep posting on this thread?

-synchronicity

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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: 71843 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 6:37 PM
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I don't have a "view;" I'm just not willing to make a decision based on religion.

Well, you don't seem to be making a decision based on data. At least none that you are willing to present so that others can poke holes in it. But you do seem very willing to poke holes in other people's analyses, even without providing any data to back up your view.....

I do, however, refute Rayvt's calculations as wildly optimistic on their face.

See, that's a view, that doesn't seem to be made based on data, since you are just stating your position, and not supplying any data to back up your position.

The historicals that you requested him to provide (and seem unable to calculate yourself) are what they are. And that shows that the caps and fees on the IUL limit it to starting the drawdown period at $2.85 million vs. the 'naked' S&P 500 position of $12.0 million.

None of the 'sophisticated Monte Carlo analysis' is going to change the historicals, only the drawdown forecast. And when you start the IUL drawdown forecast at less than 25% of the S&P drawdown forecast, effectively change the caps on the IUL drawdown amount to -5.3% to 6.7% (by imposing a 5.3% interest on the drawdown) and limit your drawdown to only $60k/year, even a Monte Carlo Analysis is going to have a hard time getting the IUL to come out ahead in the end.

Under the scenario you proposed, it's not the drawdown that is getting you, it's the limits on the build-up.

If you can't provide any data to refute the historicals that Ray provided, I will have to chalk your view up to your faith that limiting the risk on the downside will provide you with better returns in the end.

AJ

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71844 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 6:50 PM
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Sixty eight years?! Who's math challenged now?

1965 to 2012 = 47

What a riot.


It is a riot. Because here's why the 68 year number was used. Someone came up with the parameters to be used for the backtest:

~ Monthly contributions to IUL and S&P from January 1965 (age 20) (age 20) to January 2013

~ Monthly withdrawal of $5,000* from both from February 2013 (age 68) to December 2033 (age 88)


http://boards.fool.com/i-can-make-another-excel-spreadsheet-...

The person who come up with the parameters was...uh, you. You specifically asked for 68 years of information. Now you can't figure why people are using 68 years. Completely baffled. Makes absolutely no sense to you why someone would do something that crazy.

But it gets better. In a moment of exasperation you said:

One can't pick your market conditions/history. You were born when you were born. Just go with the 1960-2013 period and be done with it.

Geez.


Okay fair enough. Let's use that period, just like you suggested. But then later you say:

the calculation we seek can't be done on the "back of the envelope." The calculation is a fairly sophisticated Monte Carlo simulation.

http://boards.fool.com/who-said-anything-about-quotmedian-fa...

Wait! At first you wanted to use specific period (Geez!). But after you got it, you think using a specific period sucks and you want to use a Monte Carlo simulation.

I can see why you would be a successful mortgage broker/insurance salesman. Because the BS just never ends. Anytime someone has a reasonable question/comment it is met with a giant sh*tspray of nonsense and people get worn out trying to work through the BS.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71845 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 6:56 PM
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sykesix: "Our current example would never work for an IRA. There is a $5500 per year contribution limit. So there is no way you make an initial deposit of $10,000 and then contribute $12,000. Which brings me to the next point. For most of the history of the IRA, the contribution limit has been under $2000/year. There's virtually no way an average investor gets to $3,000,000 without either being extraordinarily lucky or more much likely 2) gaming the system."

Or 3) rolling over a large 401k plan to an IRA, no gaming the system involved.

Regards, JAFO

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71846 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 7:07 PM
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sykesix: "And you'd have to be not only exceptionally adroit you'd almost have to be magical to get $3MM in an IRA. IRAs were created in 1974 and the contribution limit was $1500/year, which was raised to $2000 in the 1980s, and up to $5000/year in the 2000s. Those are not big amounts. I realize you personally will never be convinced to crack a spreadsheet or use a calculator, but you have to have fargin' amazing returns to get to $3MM, with contribution limits that low. That was by design."

1. Why does everyone ignore 401-k rollovers into an IRA?

2. The design was intended to replace corporate pensions, as one leg of the three legged stool that traditionally consisted of (i) Social Security, (ii) company pension and (iii) personal savings, at retirement age.

Many appear to want to destroy social security, and many also appear to ignore the old thrid leg, personal savings (outside of an IRA).

Regards, JAFO

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71847 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 7:13 PM
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1. Why does everyone ignore 401-k rollovers into an IRA?

Fair enough. Have a rec

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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: 71848 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 7:13 PM
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1. Why does everyone ignore 401-k rollovers into an IRA?

I don't, but...

as an aside, can we move this discussion to another thread? Otherwise we'll let CC succeed in derailing this thread and further obfuscating things.

-synchronicity

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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: 71849 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 7:54 PM
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This is starting to look like a hocus thread from the old days.

http://retireearlyhomepage.com/hocusfree.html

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: 71851 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 9:49 PM
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You're forgetting about the 20 year drawdown period Ray added in, as well. Or was there too much math for you to bother reading his posts?

My criteria was/is crystal clear, and doesn't involve drawdown, only the end result when retirement actually arrives.

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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: 71852 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 9:50 PM
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If you can't provide any data...

It's coming...and not back of the envelope, either.

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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: 71853 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 9:53 PM
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The person who come up with the parameters was...uh, you. You specifically asked for 68 years of information. Now you can't figure why people are using 68 years. Completely baffled.

I can understand why you're baffled. You're not following the conversation. As the discussion progressed--or in this case regressed--it was decided (by me) to make it easy(er) for someone to do their alleged back of the envelope numbers, which did not include draw down.

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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: 71854 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 9:54 PM
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Otherwise we'll let CC succeed in derailing this thread and further obfuscating things.

Pffft! It got derailed and obfuscated long before I came into the discussion.

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71855 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 10:16 PM
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I can understand why you're baffled. You're not following the conversation. As the discussion progressed--or in this case regressed--it was decided (by me) to make it easy(er) for someone to do their alleged back of the envelope numbers, which did not include draw down.

Heh. I have been following the thread, and that's why I'm calling BS. Last week you said specifically that you wanted a 20 year draw down. When you didn't like those results, you decided today you didn't want to include the 20 year draw down. But Ray already provided the numbers up to the draw down date. No need to make it easier, the work is already done. You can scroll up and see them, but you won't look.

I will hand it to you, you're consistent. The goalposts are consistently moving.

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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: 71857 of 75383
Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1] Date: 4/8/2013 10:57 PM
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My criteria was/is crystal clear,

That's funny.

and doesn't involve drawdown, only the end result when retirement actually arrives.

Then, as pointed out numerous times, a B&H of an S&P 500 index fund has consistently beat the pants off a hypothetical B&H of a fund tied to the S&P 500 index level but with annual caps of 0% to the downside and 12% (or even slightly higher) on the upside, over any long term time horizon.

I'm going to repeat that this is a separate issue from whether or not an Equity Indexed Universal Life insurance product (or a standard Variable Universal life product, or really ANY life insurance product) is a good fit for a prospective client. There are a number of objectives an individual may wish to attain, and life insurance of some form may be