Is ROR Getting You the Results You’re Looking for?

Is this Just Semantics?

Before we begin discussing, let’s define some terms:

• How everyone else defines ROR: “Rate of Return”
• How we define ROR: “Return on Result”

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“Rate of Return” is the arithmetic mean of growth experienced in a financial product over a period of time. “Return on Result” includes this metric but also encompasses your goals, chosen lifestyle, and mental/physical well-being. 

At BetterWealth, one metric alone is too narrow to gauge success. Simply put, if a high rate of return inside a financial product doesn’t help you get closer to your raison d’etre, it’s useless!

Nevertheless, the conventional “ROR” metric is often touted as the penultimate metric for defining success. No matter the financial investment, the first question people ask to judge its value is usually related to the ROR.

We’re all a little guilty of this, but at BetterWealth, we are trying to shift the cultural conversation to “Result” rather than “Return.” Our mission is to make intentional living the new wealth metric and standard.

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Rate of Return vs. Life Insurance

Although ROR (rate of return) has an omnipresent financial presence, ROR evangelists tend to especially cherish using this metric like Thor’s Hammer to smash permanent life insurance advocates to pieces.

If you find an overzealous ROR disciple, one of the first things you’ll likely hear from them is how the S&P 500 has maintained a return of around 10.5% over the last hundred years. Next, they’ll tell you permanent life insurance products are a waste of money and a horrible investment. After all, why throw money into life insurance when you could earn 10.5% a year?

When it’s framed like that, who could argue? You’d have to be denser than a subatomic black hole to take a 4% internal rate of return inside the cash value of a life insurance policy when you could have a 10.5% average annual rate of return in your ETF.

If the ROR mountain is where some want to pitch their tent to weather the impending math apocalypse, consider taking a rain check.

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Rate of Return is a Misleading Metric

The rate of return over-represents gains and underrepresents losses because stock market losses have an outsized negative compounding effect on your assets (particularly during retirement distribution).

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Let’s take a focused approach: We’ll look at a market-based investment that advertises a conservative 8% rate of return, like the S&P 500 index between 1998 and 2023 (a random 25-year period). The arithmetic mean of the historical data from the S&P 500 was 8.24% during this period.

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If that’s true, then $100 invested in 1998 should yield us 8.24% a year for 25 years, which means our assets should have appreciated to $724 by 2023.

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However, if you multiply the initial investment by the gains and losses experienced in individual years, you actually get $491. Now, the internal rate of return on your investment is closer to 6.63%. That’s because the “Rate of Return” underrepresents losses.

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Worse yet, stock market losses are only one type of wealth transfer. Wealth transfers happen when money is transferred out of your control, never to return.

Taxes and Fees

Using the rate of return as the sole metric to judge financial success or defeat also masks other kinds of wealth transfers, such as taxes and fees.

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In the previous example, we found that $100 invested in the S&P 500 over 25 years from 1998 to 2023 had an ROR of 6.63%, yielding $491. If you add a 1% annual management fee, your return over 25 years drops from $491 to $375. That’s now a 5.42% rate of return.

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Suppose you are subject to capital gains tax once you withdraw money from a tax-deferred account. We could argue that the tax rate might be higher in the future, but for now, we’ll stick with the 15% capital gains tax rate that affects most Americans.

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Now, your $375 return has shrunk to $319, equivalent to a 4.75% internal rate of return.

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Losses, fees, and taxes have evaporated nearly 3.5% of your initial “conservative” 8.24% rate of return. For the amount of risk you’ve subjected yourself to for 25 years, this investment suddenly looks very inefficient. Is there a better way?

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The Ideal Environment for Wealth Creation

Wealth accrues fastest in an environment that is compounded and uninterrupted every year. If you can minimize wealth transfers, you can maximize wealth gains.

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It would be perfect if you could find a financial product that commands a high rate of return, grows tax-free, and has no management fees. Such a product doesn’t exist, but there is one that comes awfully close: Boring old Whole Life Insurance.

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• It can yield a 3.5% to 4.5% internal rate of return over the contract's life.
• It grows tax-deferred and can be used/distributed tax-free.
• There are no ongoing management fees.

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A well-structured policy can give you access to an expanding portion of your death benefit inside your cash value. You can leverage the cash value by borrowing against it, allowing you to maintain a private line of credit as an opportunity fund while your cash value grows uninterrupted.

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When structured properly, the policy never has a down year due to the guaranteed growth element and non-guaranteed dividends that accumulate inside your cash value. Many life insurance carriers we work with have not missed a dividend payment to their policy owners in over 100 years; some are approaching 180 years!

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As a bonus, every state has some protection for whole life insurance against creditors, predators, bankruptcy, and lawsuits. Depending on the state, this can range from unlimited protection (the majority) to minimal (sucks to suck, Washington). 

Choosing Result over Return

If you look at your assets through the lens of “What do I want this asset to produce for me?” rather than “What is the rate of return I can expect to get?” you are in the beginning stages of shifting your mindset to a more comprehensive “Return on Result” (ROR) mindset.

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What if you chose your financial products to fit your goals, lifestyle, and mental/physical well-being rather than vice versa? What if the metric of living an intentional life was JUST AS IMPORTANT as the rate of return of the financial product? What if it was MORE IMPORTANT?

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Rather than determining the value of a financial product through rate of return alone, what if you extended the value determination to the result of having it in your life?

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• Can you sleep more soundly at night?
• Can you show up more powerfully to work?
• Can you give more generously?
• Can you use it to increase your wealth efficiency?

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All these questions are worth asking yourself. 

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The all-too-common “one day… someday…” financial planners are looking in and scratching their heads at the idea that rate of return isn’t the end-all, be-all wealth metric. They were trained to encourage their clients to put money away into vehicles they don’t fully understand by showing them a unicorn of 10-12% rate of return for the next 30 years so that these clients can one day… someday… retire happy and be rich.

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The metric and standard for financial success must change from numbers on a balance sheet to the embodiment of an intentional life — if you can do both, that’s even better.

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We find that most people cannot do both. Something is often sacrificed along the way. Whether it’s the opportunity cost of market losses, taxes, and fees or the much more painful lost time and connection with our family, chasing returns instead of chasing results is a recipe for a dissatisfied (and often risky) life. 

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Make Intentional Living the New Wealth Standard in Your Life. 

If you’d like to learn more about us, our mission, core values, and our beliefs, check us out here.

If you want to diver deeper into the numbers, check out The Vault: one stop shop for overfunded whole life insurance.

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Ready to talk to an expert and get started? Schedule a free clarity call here.

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