A friend from college recently contacted me and asked if I would be interested in setting up an Index Universal Life (IUL) Policy for the purposes of saving for retirement. He explained the benefits of how the policy reduces market risk, “guaranteed income” during retirement, no taxes from loans, a death benefit for beneficiaries, etc. At first I was mystified and it seemed like a no brainer. Most of the reasons for an IUL were qualitative and the one quantitative “evidence” provided was a detailed illustration from Allianz. It showed how the IUL would provide endless income during retirement and the Accumulation Value would never go down. It assumed a constant 6.9% return year over year since this is about the historical average of the S&P with $24k/year in after-tax premiums for 25 working years and then starting at age 66 (I am currently 40) I would be able to take a loan from the policy for $163,227 and use that money as tax-free, spendable income for basically ever.
Now, my background is in Aerospace Engineering. I have been a Systems Engineer on space programs for the past ~15 years and I am used to thinking about systems or “machines” which have inputs, make adjustment or perform actions to the inputs based on parameters and then provide outputs. I design, evaluate and troubleshoot such machines and felt I could re-create a model to evaluate 5 types of “machines”, which included an IUL, 401k, Traditional IRA, Roth IRA and Discretionary Brokerage account. I then asked myself, “Which retirement “machine” yielded the most output over the last 150 Years? And, how did an IUL Compare?” To perform this evaluation, I said, if I died at the end of 2018 (or 2017, or 2016 and so on and so forth), after retired for 25 years and had worked for 26 years, which retirement “machines” yielded the most output.
For this model the input would be pre-tax earned dollars and the output would be post-tax, spendable dollars. I used the detailed illustrations to set the output at $163,227 for each case and the input at $30k/year pre-tax earned dollars, which equates to $24k post-tax dollars, assuming a 20% tax rate. I assumed a constant input and output and didn’t make adjustments if the account went to or got close to zero. I also took into account all the other parameters involved in a IUL and other “machines” that are detailed in the slide package linked below. I wanted the full, big, picture that I could quantitatively evaluate and not base my decision to invest into an IUL based on just the detailed illustration and qualitative reasoning.
Here is the spreadsheet comparing the IUL detailed illustration to the other cases
https://drive.google.com/file/d/1pKgG8MwcLrLKZbRjDjddhgDasNeLjlKK/view?usp=sharing
Here is the detailed illustration from Allianz
https://drive.google.com/file/d/11AXqc-2nmkKxpMhRrMXXzN_PekYubI31/view?usp=sharing
Here is the slide package detailing the model and results
https://drive.google.com/file/d/1U2i40GHgHLUX2yDt8FdELzlIQHD3TuQc/view?usp=sharing
Results
The results are detailed in the end of the slide package. In conclusion, the IUL performed the worst compared to the other “machines”. It only becomes a comparable alternative to a discretionary brokerage account when you have a 90/10 S&P stock to bond (10 Year T-Bond) portfolio during the working years and a 70/30 stock to bond portfolio during retirement years. It only becomes a comparable alternative to a Roth/Trad. IRA account when you have a 70/30 S&P stock to bond portfolio during the working years and a 50/50 stock to bond portfolio during retirement years. Those allocations are too conservative for me and hence I decided not to setup a IUL policy. However, this is based on my risk tolerance and others might have different risk tolerances. I just try and present the data and each can make a determination. I also have not filled up my retirement bucket accounts. Once those limits are reached and I desire a conservative to a discretionary brokerage account, I may consider an IUL. Until then, an IUL is not for me.
Feel free to comment and ask for adjustments to the model. My goal in this exercise was to determine the best “machine” for me. I have no bias. I am not a Life Insurance Agent or Portfolio Manager. I just wanted the truth from an unbiased source: the data. I hope this has helped others since determining retirement plans is stressful and confusing but I believe my scenario is not dissimilar to others.
Submitted November 07, 2019 at 05:20PM by zolly84606 https://ift.tt/2K1XhUB
