When is a 7% return better than a 10% return?

How many times have you heard a financial advisor state that If you keep your money in the stock market for the long run, it has returned over 9 or 10%? Clients that I talk to you never seem to get excited when I mention that the returns on an equity-indexed UL have historically returned over 8% per year. Worse yet, when I run illustrations for clients, I generally show them at 7% or 7.5% to be conservative.

Let me ask you this question: if you are lucky enough to have your money growing at 10% per year in a traditional IRA or 401(k) plan, what will your net return be after you pay your taxes? If you are in a 28% tax bracket, that means you will be averaging a little better than 7% after-tax.

Let that sink in. You kept your money in the market at risk of 20 – 40% losses in any given year due to market volatility. You hoped that over the long run your portfolio would average at least a 9%. And when you took your money out and payed your taxes, you were only left with just over a 7% net return.

You shouldn’t have to work that hard just to earn a 7% return when there are options available to you that have achieved over 8% historical returns with no market risk.

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