I've been researching life insurance, and got sucked into whole life policy research, and in every article that says it's a bad investment they assume you can invest the money in some 10%/yr return mutual fund.

Where does this 10% return number come from?

  • Are there any actual studies of normal investors averaging this number?
  • Is the 10% just a myth perpetrated by stock brokers?
  • Is this just repeated folk wisdom that feels about right over any random 30 year period, and it's a nice round number?

It's entirely possible the correct answer is: #3
But someone had to say it first, and it's repeated everywhere with no source or proof.
Where did it come from?

(I edited this to get to the crux of my question, and remove my personal experience, since it is skewing the answers. Look in the question history if you want to see it.

When I see an article telling me whole life insurance is a bad investment because costs are high, and returns are only around 4%-5%, with a guarantee, I think wow, guaranteed 4%, tax deferred, awesome. The comparison to the 10% mutual fund doesn't make sense to me.)

  • I've had the same question, but have heard people use 12% in the argument! Aug 10, 2011 at 15:58
  • I saw that too, and that article immediately lost all credibility for me, making it hard for me to figure out the REAL reason whole life is bad. That real reason is that the "cash value" does not belong to you, you don't get it back :)
    – Jay
    Aug 10, 2011 at 16:15
  • I think it exists mostly in the minds of retirement planners dreams. They sell more by telling you they can get you 10% when you can buy other funds that are only promising 6 or 7 and these days 1 and 2. Then after they hook you they make you sign the fine print that these are projections and they are not responsible for losing your money you just have to pay them their fee anyway.
    – user4127
    Aug 12, 2011 at 18:52

4 Answers 4


That number may be based on a long term historical view of the stock market. If you look at some long term charts for the DOW or the S&P500, you'll see that overall the upward trend is pretty good. However there are some pretty huge flat spots in those charts, and if the majority of your investements have been made during one of those periods, you may not have seen a lot of growth.

If you look at periods between 10-17 years or so, you can find places where it would have really sucked to be you (look at the S&P chart and imagine 66 to 83.. OUCH!) and places where things were stellar. If you expand to about say 30 years or so, then it's hard to find a period without at least some good growth in there somewhere.

If you panicked during a downturn and sold on the low, things of course get much worse.

How your own portfolio has done will depend a lot on how the funds you chose have done, how much you put into equity vs fixed income, and if the fixed income was in actual bonds, or a bond fund.. Bond funds are subject to a lot more fluxuation as interest rates rise or fall than something like a t-bill or i-bond that you own outright and plan to hold to maturity.

  • "That number may be based on a long term historical view of the stock market." I guess that's my main complaint, every one uses it, and it MAY come from some long term historical view nobody can pinpoint... but anyone can pick any random period (as you did) and show awesome or horrible periods, and this 10% is still the number quoted.
    – Jay
    Aug 9, 2011 at 21:05
  • I'm not defending a 10% number (I don't agree with it), but rather trying to provide a potential basis for where it might come frome. As to picking a good vs bad period, that's true mostly for shorter periods. If you are looking at the horizon of someone who is 20 years old, planning to retire on 40 years, then using a 30 year period isn't too far out of line. And the return on even a 'poor' 30 year period isn't that bad. (although if one had the year to year numbers and a spreadsheet, it might be interesting to see the mean and deviation of all possible 30 year periods Aug 9, 2011 at 21:28
  • 1966-1983 returned 7.59%/yr CAGR. Why the "ouch"? May 9, 2012 at 1:16
  • The high around '66 was 93.81 The low just before 83 (which is what I was thinking of) was 103.71 That's just a little over 10% gain, over nearly 17 years.. Worse would be the high in late '68 where it was 108.37 to that same low, you'd have lost around 5% over about 15 years (there's your ouch). If you take the '66 low (later in the same year) where it was 73.20 and go to the high in late '83, at 170.8 you have a huge gain. My point was that if you want to pick carefully you can find periods even over the same general range that sucked, or that rocked. May 18, 2012 at 19:38
  • Interesting exercise for something that has the time to pull out the numbers and do some math. Presume you started in 66, and you invested every time the market got 'hot' and everyone got excited, and look where you'd be in late 82. Now presume using dollar-cost-averaging over the same period buying a little every month. or even 4 times a year, instead of being 'trendy', and look how much different it would be. May 18, 2012 at 19:47

10% seems to be a little bit too optimistic, but 5%-8% annually on average is doable. 1% is way too little, you're doing something wrong, unless you mean real return (i.e.: after adjustment for inflation), and even then it's not too high.

At any given year it may be easy or difficult, but the point is that we're talking about long term averages.

For example, if you look at the DJI for the last 30 years, you'll see a rise of 1300% (give or take), which annually is ~40%. In the last 3 years the rise is even steeper, but in the last week - it is negative.

So it depends on your time line and the way you manage your investments. You've got to balance between stocks and bonds and cash, but even if you park your money in cash you can get more than 1% right now (Capitol One on-line savings is 1.15%), and that's with the lowest rates ever, so getting 1% over time does mean that you're doing something wrong IMHO.

  • 4
    I think your 40% number is off, probably due to failing to account for compounding. at 10% annual the dow goes from 1000 to 13K in 27 years.. so the 30 year rate for the DOW is probably a little less than 10% Aug 9, 2011 at 17:52
  • So why did you pick 30 years and where did you get that number? If I look at my investing time-line, it's much less rosy, but I still missed the boat. If I look at 19 years the DOW is up 259%, SPY up 239%. (Yahoo historical #s, 1/1/1992-1/1/2011, so excluding the latest drop.) If I look back 10 years, Dow is DOWN 6.3% and SPY is DOWN 9.4%, Ouch! (1/1/2001-1/1/2011) ( Unfortunately, most of my income has been that last 10 years, and in the 90s I wasn't very knowledgeable, and obviously missed the run-up :( Either way, so to answer my question, the 10% is BS, yet I still see it quoted.
    – Jay
    Aug 9, 2011 at 18:13
  • 30 years is what will take it for your pension to mature. If you're already convinced there's no point in asking questions, don't you think? It's not BS, and you can get gains even when the market is down with shorts and such, if you know what you're doing. If you don't - you don't. It's not the brokers fault.
    – littleadv
    Aug 9, 2011 at 18:29
  • @littleadv - I know my investment choices matter, and I'm venting a little. I tend to put it in an index + bond fund, and let it sit. I'd still like to know where this 10% number came from. It's quoted everywhere, but never referenced to a source. Over the last 19 years, it's actually close. I'm pretty sure my returns are lousy just because over the last 10 years it's negative, coinciding with the bulk of my income and savings. I've got 25 years to go, so I'm pretty sure it will be up again, and we'll see about that 10%.
    – Jay
    Aug 9, 2011 at 18:43
  • 2
    The other way that long term investors look at a prolonged period of little to negative growth is that this is a prime period in which to invest. Your money buys more shares when things are low, which means you are better positioned to take advantage of the next run up. this is why many refer to downturns in the market as 'buying opportunities'. For example even if you didn't buy at the low, imagine how happy you'd be if you invested spare cash when the dow was just recently down in the range below 9K, or even better yet below 8K. the last few years would have made a bundle on that. Aug 9, 2011 at 18:43

There's a cool calculator at Money Chimp that lets you plug in a start and end year and see what the compound annual growth rate of the S&P 500. The default date range of 1871 through 2010 gives a rate of 8.92% for example.

Something you need to take into account when comparing returns to a whole life policy is what happens to the cash value in your policy when you die. Many of these policies are written so that your beneficiaries only get the face value of the policy, and the insurance company keeps the cash value.

  • I'm passing on the whole life, because it doesn't make sense for me, but the comparison is still apples to oranges, and yet is the standard comparison. I've maxed my tax deferred retirement accounts, so the comparison doesn't make sense there. Mutual funds can have high fees, and taxable events you have no control over. 10% feels arbitrarily high. Yet it is the standard comparison on any investment or insurance product, and it drives me nuts.
    – Jay
    Aug 9, 2011 at 21:00
  • SOME mutual funds have high fees and taxable events. Most INDEX based funds have very very low fee's and few taxable events as they only tend to sell a lot if there is either a lot of money flowing out of the fund, or their is a change to the index, so historically they have been very tax efficient. I'm also not sure where/how it became standard. I wouldn't use it, and similar stuff I remember looking at years ago was 7%. Aug 9, 2011 at 21:23
  • regarding the answer. the other thing to consider is the effect on the value of the policy if the company that issued it goes belly up. Aug 9, 2011 at 21:24
  • I like your 7% number better. 8.9% is not 10%, particularly when you add expenses.
    – Jay
    Aug 9, 2011 at 22:09

NYT republished a nifty infographic that shows how the S&P 500 performs over various time horizons. If you study it for a bit, you'll see that 10 percent is not likely over time that you'll earn 10 percent annually after inflation. Most people quoting the higher number are working with numbers before inflation.

The above linked chart is misleading in the following sense: it groups into five categories, who's boundaries are demarcated by percentages of interest. But we'd rather see them clustered by those percentages. For example, 6.9 percent falls into the neutral category (better than investing in fixed interest securities, but still below market average), but 7.1 falls into the "above average" category. The effect is that we will treat the neutral color that dominates the long term trend as being somewhere in the middle of 3-7, when I suspect that's not the case. Some day I'll probably make my own version and see how that plays out.

So that all said, if you look at the 30 year diagonal, you can see there's still quite a bit of variation in returns. Unfortunately I can't turn this into a single number for you, but grab a spreadsheet and some market data if you want one.

  • Very nice, and jives much more with my personal experience. I have been working with historical data and playing with numbers myself. Will post some results.
    – Jay
    Aug 10, 2011 at 15:34
  • 1
    For what it's worth, a bit more digging shows that chart used a 2% annual expense from 1900-1975, and then 1.5% from 75-99, 1% since. Crazy to use those fees, take out inflation and still expect a good chart. I'd go with MoneyChimp as Randy suggests below. Aug 20, 2011 at 3:45

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