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Old 08-06-2015, 07:45 AM   #121
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So where does the money come to cover the down years in the market? Obviously, some comes from the cap on the good years - they are just holding your money for you, and give it back later.
From my spreadsheet (SPX 1950-2015) , a 0% (no loss) floor saves you from a -11.8% (average) loss. For a 12% cap, the average gain when above 12% is 22.7% -- which gets capped at 12%. The average gain when between the floor and cap is 6.6%

People don't realize how often the S&P500 annual gain is more than 12%.

Below 0% = 27% of the time
Above 12% = 44% of the time
Between = 29% of the time.

So.. about 1/4 of the time you avoid losing -12%, about 1/2 the time you get 7%, about 1/2 the time you get 12% when you should have gotten 23%.
Overall, you miss 11% gain twice as many times as you avoid 12% loss. That's a net loss right there.

The average annual gain is 8.8%, the average gain with cap & floor is 7.2%.

AND...you don't get the dividends which is about 3.5%.

AND...they charge you fees in the range of 3%-5%.

Oh, and if they feel like it, they can reduce the cap from 12% to 1%.

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

It took me quite awhile to come to the realization of what you said. They hold your money, take a huge skim off the top, and then cover your down years with what's left of your own money.
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Old 08-06-2015, 07:57 AM   #122
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[...] The average annual gain is 8.8%, the average gain with cap & floor is 7.2%.

AND...you don't get the dividends which is about 3.5%.

AND...they charge you fees in the range of 3%-5%.

Oh, and if they feel like it, they can reduce the cap from 12% to 1%.

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

It took me quite awhile to come to the realization of what you said. They hold your money, take a huge skim off the top, and then cover your down years with what's left of your own money.
Absolutely magnificent post. Thank you very much!
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Old 08-06-2015, 08:31 AM   #123
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From my spreadsheet (SPX 1950-2015) , ....

The average annual gain is 8.8%, the average gain with cap & floor is 7.2%.

AND...you don't get the dividends which is about 3.5%.

AND...they charge you fees in the range of 3%-5%.

Oh, and if they feel like it, they can reduce the cap from 12% to 1%.

...
Thanks for the numbers to illustrate the details behind this.

Quote:
... It took me quite awhile to come to the realization of what you said. They hold your money, take a huge skim off the top, and then cover your down years with what's left of your own money
Outside magic, that's really all they can do.

Other than academic curiosity (which is fine), I really don't understand what Ready expects to get out of this. That's all there is. It's buried in fine print and formulas, but there is no way out.

-ERD50
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Old 08-06-2015, 08:37 AM   #124
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Other than academic curiosity (which is fine), I really don't understand what Ready expects to get out of this. That's all there is. It's buried in fine print and formulas, but there is no way out.

-ERD50
Well, I've learned a lot about indexed annuities so far. Learning about new things is an important aspect of my ER experience. And, I'm curious to see how far I can push this salesperson before he gives up, or flat out lies to me. I suppose it's a form of entertainment for me.
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Old 08-06-2015, 08:45 AM   #125
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Well, I've learned a lot about indexed annuities so far. Learning about new things is an important aspect of my ER experience. And, I'm curious to see how far I can push this salesperson before he gives up, or flat out lies to me. I suppose it's a form of entertainment for me.
OK, I can relate to that. I just wasn't sure if you were thinking there was possibly 'something' to these products.

It might be a little interesting to see where the salesperson goes. I suspect he/she will move to greener pastures, rather than try to justify the products to someone asking hard questions.

-ERD50
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Old 08-06-2015, 09:02 AM   #126
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I really can't believe that anyone would value a steak dinner this highly? What a hassle!
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Old 08-06-2015, 09:07 AM   #127
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Well, I've learned a lot about indexed annuities so far. Learning about new things is an important aspect of my ER experience. And, I'm curious to see how far I can push this salesperson before he gives up, or flat out lies to me. I suppose it's a form of entertainment for me.
It's entertaining for me to listen to your encounters with him. I'm looking for the next chapter in the book.
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Old 08-06-2015, 09:10 AM   #128
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It's entertaining for me to listen to your encounters with him. I'm looking for the next chapter in the book.
+1
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Old 08-06-2015, 09:58 AM   #129
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That's an excellent link, ETFs_Rule. And not just for annuity advice.
Thanks for sharing!
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Old 08-06-2015, 11:00 AM   #130
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I would rather break rock than engage in this decidedly odd pastime.

Ha
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Old 08-06-2015, 11:57 AM   #131
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I can appreciate the fact that this exercise is not for everyone. We all have our own diversions in ER. I know many people who watch hours of television each day. That would be mind numbing for me.

When I was young, I used to love reading mystery novels. A story would unfold where a set of facts were presented that looked very clear cut. But as the story progresses, each chapter would unveil a new piece of information that by the end of the book would make it clear that the initial story was filled with obfuscation, deception, partial truths, or just mind tricks that make your brain think one thing when the facts presented would state otherwise. These stories always fascinated me, and taught me to dig deep when someone presents facts that don't seem credible at first glance.

This story began with a sales person telling me I could have the upsides of the stock market, with no loss of principal, and an overall return of 8-10% per year, risk free. A proposition that was so attractive that anyone who didn't purchase these products would be foolish.

As the story unfolded, the ER community has helped me to shed some light on how these products work.

As Braumeister pointed out, we've had an unusually long bull market, which may make the returns appear better than expected for this particular period of time.

ETFS_Rule pointed out that return on investment is not the same thing as return on income base, protected benefit value, and interest crediting. And he also found a great article on the real returns of indexed annuities.

rayvt developed a spreadsheet that showed the long term effect of investing in these products vs direct investment in the S&P 500. And also astutely pointed out that dividends are not included when calculating potential gains for this particular product.

MRG found a great review on the Allianz 360 product which exposes the complex financial formulas used to calculate the potential market returns on the principal.

So I feel like the story is almost over here. In my last conversation with the salesperson, I insisted he find me a positive review of the Allianz 360 product. He pointed me to a web site written by a guy peddling a book that teaches salespeople how to sell more annuities. He could have just ended the conversation, rather than pointing me to this most absurd web site as a justification for his product recommendations. And I haven't heard from him now for 24 hours, so he may realize that he's not going to be able to produce the information I'm looking for to validate the purchase, and he may just disappear into the night.

I really didn't expect him to follow up with me after he left my home, as I made it clear to him that I would thoroughly investigate any product he pitched to me, and I would not purchase it until I fully understood it.

I give the guy credit for having the stamina to keep coming back.
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Old 08-06-2015, 12:31 PM   #132
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I can appreciate the fact that this exercise is not for everyone. We all have our own diversions in ER. I know many people who watch hours of television each day. That would be mind numbing for me.

I get what you're doing, not something I could do, but good j*b. Actually I'm learning a lot about these products too based on this thread. Very timely for me in that a buddy was being hit up by his FA to look at annuities, I referred him here. Gave him a quick overview of what has already been discussed, he was impressed with the research into these products.

Thanks for the education!
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Old 08-06-2015, 12:53 PM   #133
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Greatly appreciate Ready's diligence and the resulting education for all us.
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Old 08-06-2015, 01:20 PM   #134
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This has all been a great read. Just last week I finally convinced my 70 y.o. mother to not get sucked in to a Allianz 360 annuity by a "great local advisor" . Instead we rolled over about 1/4 of her finances (all IRAs) from CDs at a bank into 2 IRAs (Roth and Traditional) managed in a discount brokerage. Now I just need to put together a list of dividend aristocrats for her to select from.
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Old 08-06-2015, 05:04 PM   #135
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People don't realize how often the S&P500 annual gain is more than 12%.

Below 0% = 27% of the time
Above 12% = 44% of the time
Between = 29% of the time.
I'd like to see what returns are when the S&P P/E ratio is above 20.
As of July 31, 2015 it's at 21.59 P/Es & Yields on Major Indexes - Markets Data Center - WSJ.com

The DOW is at 16.68
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Old 08-07-2015, 06:47 AM   #136
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I would rather break rock than engage in this decidedly odd pastime.

Ha
+1. Also agree though that reading this thread has been interesting. Ie just confirms the first point.
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Old 08-07-2015, 07:12 AM   #137
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I'd like to see what returns are when the S&P P/E ratio is above 20.
My spreadsheet is here: https://www.dropbox.com/s/cbzvg74iye...d-IUL-test.xls
To get what you asked, go to the "Return Distrib" sheet and insert another column with historical P/E ratios and then another col for selection of returns based on P/E, like the 3 columns that do the floor & cap.
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Old 08-07-2015, 07:45 AM   #138
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Funny thing about the history behind my IUL spreadsheet. There were a series of threads on, of all places, a Buying A House & Mortgages board, and one guy kept recommending to people to buy an IUL. His claims sounded attractive but I needed to verify, so I whipped up a quick&dirty little spreadsheet --- and discovered that for long term IUL's severely underperformed the S&P500.

As the debates & discussions continued, I enhanced the spreadsheet a bit at a time.

One of the other frequenters in that board has a habit of being often hysterical about certain things, but otherwise often quite cogent & rational. She tee'd off on me and called me every name in the book, typical taunts, name-calling, mocking, etc. that we all see on message boards. When I didn't go away, she flaunted that she had her own spreadsheet that absolutely demolished my anti-IUL arguments.

She totally swallowed the bit about no market losses (which is true), but completely ignored what the cap and lack of dividends did to the overall return. Avoiding the bear markets was so important to her that nothing else mattered.

To prove her point, she said that nobody could ever accept losing 50% of their money, like the S&P did in 2001 and in 2008. It really took her back when a dozen-plus people chimed in, "Well, I was in the market then and yes my account got chopped in half, and no it wasn't fun, but yes I accepted it and stayed in." And then a number of people asked her if she'd rather have $200K in an IUL that sidestepped the 2001 bear market, or an S&P500 account that got chopped from $1.4M down to $900K.
Or, in 2008/09 an IUL with no-loss $155K vs. a S&P500 that got chopped in half from $1.5M down to $800K.

Most of the commenters allowed as how they'd rather have $800k that used to be $1.5M than $155K that used to be $155K. Something about $800K being a whole lot more money than $155K.

Typical SJW-like fluff, claimed that it showed me to be completely wrong, but wouldn't share her spreadsheet because we were being rude to her. Well, eventually she posted it, and said "See, told you so. My sheet shows that ray was wrong. Mine shows that S&P500 is better than an IUL, but ray claimed that S&P500 is _much_ better than an IUL."

Nowadays, I primarily use the spreadsheet to look at various aspects of the market (S&P500), accumulation & de-cumulation methods, distribution of returns, etc. It's got all kinds of info about S&P, T-bills, inflation, etc, so I can quickly come up with an answer to new thoughts or questions. I don't look at the IUL part anymore, because that matter had been settled.
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Old 08-07-2015, 10:02 AM   #139
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The spreadsheet and a summary of this thread would make a good FIRE site sticky.

If I encounter the subject in the future I would have to search this site to find this thread.
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Old 08-07-2015, 10:45 AM   #140
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The problem with arguing with a believer is that, if you win, they have to change their core belief. People do not do that easily. Often they just disappear rather than face it.
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