No financial experts or gurus can predict future market performances, however, looking back at historical trends and returns could provide us insight into how your retirement plan may perform in the future. In this episode of Money Script Monday, Jordan concludes the 3-part series about Your Personal Wealth Report and demonstrates how an IUL policy would perform in historical markets.

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Video transcription

Hi and welcome back to Money Script Monday. This is Jordan Arias, and today we're gonna be going over part three of Your Personal Wealth Report. In part three, we're going to be talking about historical performances and market returns. So with that, what we're going to really look at are index results. We're going to look at the true average rate of return, we're going to do some S&P comparisons, and then lastly, we're going to look at our historical effects on our cash accumulation. So with that being said, let's jump right into it.

IUL performance in historical markets

What we're looking at here are illustrated rates. Can we run the illustrations at a certain rate and be confident that we are going to receive those returns within our time horizon in our life of our insurance contract?

Calculator Assumptions

Here are some of the assumptions that we're looking at when we're focused on interest rates and rates of return on our IUL contracts. We're keeping all of the same parameters the same as you have seen in the previous videos. We have the same index strategy. We're looking at what's called a one year point-to-point. So, they're taking a snapshot today and then exactly one year from now with regard to that index. And we're looking at our participation rate of 130%. We have a floor of zero and an index fee of zero as well. So, we're saying, "Okay, you could earn anywhere between 0% in terms of the floor, and then whatever that index earns, you'll receive 130% of that participation rate."

Those are kind of our parameters when we look and say, "Okay, if we were in a product just like that, how would it have performed?" You know, can we look at certain periods of time and certain time lengths as well? That's the most important part.

One of the things to focus on when you're looking at rates of returns or historicals is to really look at the true average of the average. And that's what we focused on here in our Wealth Report. It's not just picking one favorable period of time that's going to make the illustration look good, but it's actually looking at multiple periods in time to come up with the actual average of those averages. And that's what we're doing here.

To illustrate, this example is showing you the first line that you'll see in my box is index crediting period start date, 3/2/1989. The index crediting period last is 8/3/2002 and number of years is 15. So what that is telling us is, for this illustration, for this look-back, we are going to be looking at 15-year periods. So if our time horizon is 15 years, if it's 10 years, if it's 20 years and we want to get an idea of what we can expect to earn in the next 5 years, in the next 10 or 15, we have the ability to change that within this report.

If we're looking at a 15-year period, we've done a start date of March 2nd, 1989. What that's going to do is it's going to start March 2nd, 1989, and then 15 years from that point. And then it's going to go March 3rd, 1989, 15 years from that point. All the way until you get to August 3rd, 2002, 15 years from that point. Since, right now, we are in August 2017, you can see that that's 15 years back from today. So that's the furthest we can go.

If we did a 5-year number look-back, then we could go all the way up until 2012. So, in this case, we're going 15 years, so that's the last day.

You can imagine that's a lot of 15-year periods. And do we expect it to look at every single one of those? No. But what we're going to do is we're going to take all of that data and condense it. And we want to illustrate that.

Index results for hypothetical percentile rates for rolling 15 year periods

That's what the next slide shows is historically, after all of those 15-year periods starting back from 1989, what's the average of all of those 15-year periods? And that's where you see we were going to show you, with 80% confidence, with 90% and 100%.

First, a typical scenario. We say, "Okay, with 80% confidence of those 15-year periods, you would have received a 7.31% illustrated rate of return." We want to be able to underpromise and over-deliver. And what I mean by that is we want to be as extremely conservative on these illustrations as we possibly can. When you see illustrations that are run at really high interest rates, we want to make sure that those are predictable and that those have a high likelihood of happening. And so we always want to dial it down.

If you're working with somebody, keep on the lookout for how high they're running those rates and where they got those numbers from. If they have data like this to be able to prove where they got those numbers from in terms of your time horizons, say you have 20 years, 30 years before you start to wanna access the cash value from your insurance contract, that might lean to a higher illustrated rate.

So, for this report, we're looking at 15-year periods and with 80% confidence of those data points, every single one of those data points starting from 1989, and then so from March 2nd, 15 years, from March 3rd, 15 years, and so on.

And then we look at a conservative ratio. Even going with 90% confidence, we're going to get a 7.08% rate of return over that 15-year period.

Then with 100% confidence. We're taking all of those 15-year data points starting from 1989, and we're assuming, again, that we have a floor of 0, so we're never going to lose or have a negative return in our account. And we're going to have an unlimited cap that's going to give us, again that 130% participation rate.

So with that being said, it's 6.61% illustrated rate that we can expect to return. The biggest reason is because we don't have to recoup from any losses. And that's what I'm going to show you here in a second when it comes to market volatility.

Of course, you can see we want to show what the maximum is. If you hit it out of the park in the best 15-year period out of all those data points, it was 11.6% rate of return.

Then the average rate of return that someone can expect is 8.67%.

We are more highlighting the 80% confidence, 90%, and 100%, but you can see out of all those data points, the average rate of return is 8.67%.

We also like to compare that and say, "Okay, if we were in the S&P, how does that look? How does our index strategy on our Indexed Universal Life look compared to the S&P?" And it's an 88% probability that we have a higher return inside our IUL strategy over the S&P, over all of those data points.

Average hypothetical indexed return

So we have that start date of March 2nd, 1989. And when you're looking at your report, the further back you go, the more data points there are.

For example, in this scenario, we started March 2nd, 1989. Again, we go then 15 years from that point, March 3rd, 1989, 15 years from that point all the way until we get to August 2002. And that's 15 years, which brings us to today.

That's 4,903 15-year periods. You could see here, we are not looking and trying to "cherry-pick" the best 15-year period to say, "This is going to give you this rate of return. You're going receive a 7% or 7.5%, or 8% rate of return." We want to be able to provide you the information so that you can then come to your own conclusion based off of your time horizon what makes the most sense and what you can expect to return.

This report really highlights with confidence the types of returns that you can expect if you're looking at specific time periods, meaning 5 years, 10 years, 15 years. You can go back as far as you want in terms of data to give you more than 4,900 data points, or less if you're looking at potentially longer durations, 30-year periods.

This is showing you the raw numbers in terms of those parameters that we set in that first slide. There's 4,903 data points. And so the graph that you're looking at is every one of those 4,903 data points.

The blue is reflecting the index strategy on the IUL, and the red is reflecting the S&P.

As you can see, this is where that 88% that I showed you that it outperformed the S&P comes into play. So 88% of the time, the index strategy on each of those singular data points gave you a higher return than as if you were in the S&P or followed an index of the S&P directly.

This is not linear in the sense of what you can expect up and down in volatility, it's every single one of those points represents the 4,903 data points. You can see, with those arrows, there is only a couple periods where the S&P outperformed the index strategy. Those are when the reds are showing higher than the blues that means that the S&P outperformed the index strategy for that 15-year period.

Historical effects of cash accumulation

Let’s look at how that looks in terms of dollar amounts. This next slide, with regards to just focusing on rates of return, really shows how the volatility correlates to the actual cash accumulation, to the actual dollar amounts.

We can talk about percentages. And you know that average rates of return can mean many different things. You can get to the same average rate of return many different ways.

But what this highlights is the importance of a lock and reset. And because we have a floor of zero and we can't lose any money, and we don't have to recoup those losses from a negative return if we were volatile, that's where the performance really comes into play of historically having higher rates of return being able to get into the sevens and eights on an average rate of return for our index policy.

You can see that, by my first arrow, we're illustrating here. In 2000, early 2000, the dot-com, you can see the red is our S&P again and the blue is our index strategy. The red, you know, there was a dip in the market. There was 20%, 30%, 40% losses for individuals based off of their accounts.

If we have a floor of zero and we can just go horizontal, which is what our blue line is showing for that particular period, we didn't earn anything, but we just moved horizontal.

Well, what happens is when the market then starts to return, we've covered our floor rate at 0% and we have upside potential, we know that that upside potential is limited because they're going to give us a certain amount that we can earn. However, if we moved horizontal and the red line goes down, well, then they both receive returns, even if our blue line is capped to a certain amount, you could see they both then correlate. They're both going to go up.

And when that continues to happen over years, again, I didn't put an arrow on it, but in 2008, we could see how drastic that drop is where we know the average negative return was around 40%!

Again, if we just moved horizontal, then when everything starts to go up and we've been in such a bull run for the last nine years, that we do not have to worry about recapturing those losses.

So if we had $100,000 in the bank and we had a 30% drop in the market, we don't have to earn over 40% just to get back to even. Anything that we earn is actually gains above that principal value that we started off from the previous year.

That's the real magic when it comes to actual hard dollars when you're looking at it as if we can mitigate the losses and make sure that we're still capturing some upside potential, well, our average rates of return are going to be higher and our cash accounts are going to be higher as well.

Request your free Your Personal Wealth Report

That wraps it up for part three of the Your Personal Wealth Report video series reviewing the entire report.

If you’re interested in having your own personal wealth report that is customized to your unique situation, please use the information on this page and request one today! Thanks for watching and take care.