Why Rate of Return Is the Wrong Question
Why Rate of Return Is the Wrong Question
When evaluating financial decisions, many business owners instinctively ask a familiar question: “What is the rate of return?” In investment discussions, this question is natural—and often appropriate. In long-term corporate planning, however, it is frequently the wrong question.
The Limits of Return-Based Thinking
Rate of return measures performance in isolation. It does not account for how, when, or at what tax cost capital is ultimately accessed. For business owners planning across decades, focusing solely on returns can obscure more important considerations:
- After-tax outcomes
- Timing of distributions
- Flexibility under changing circumstances
- Estate and succession implications
A strategy with a higher nominal return may produce a lower usable outcome once taxes, constraints, and timing are taken into account.
Why This Matters in Corporate Planning
Corporate structures introduce layers that simple return metrics cannot capture. Capital earned inside a corporation may:
- Grow efficiently at first
- Face high tax friction when extracted
- Be subject to additional tax at death
As a result, two strategies with similar or even identical returns can produce dramatically different results for the business owner and their family. This is especially relevant when evaluating long-term tools such as corporate-owned life insurance or integrated liquidity strategies.
The Question Behind the Question
When business owners ask about rate of return, they are often expressing a deeper concern:
- Will this decision leave me better off in the long run?
- Am I giving up flexibility?
- Is the trade-off worth it?
These are valid questions—but they are planning questions, not performance questions. Answering them requires a broader framework than annualized returns.
A More Useful Set of Questions
In long-term corporate planning, more informative questions include:
- What is the after-tax value of this strategy over time?
- How and when can capital be accessed?
- What risks arise if circumstances change?
- How does this decision affect my estate and succession plan?
These questions acknowledge that outcomes are shaped by structure, not just performance.
Why High Returns Can Be Misleading
Strategies optimized for return often assume frictionless access to capital. In reality, corporate and estate taxes introduce constraints that compound over time. This is why some lower-return strategies can outperform higher-return alternatives after tax, particularly when viewed across a full lifetime. The difference lies not in investment skill, but in structural efficiency.
Shifting from Performance to Outcomes
Rate of return is a useful metric—but only within its proper context. For business owners, the ultimate goal is rarely to maximize returns in isolation. It is to convert corporate success into personal security, flexibility, and long-term family outcomes. That requires asking different questions.
If your planning decisions are being evaluated primarily through the lens of return, it may be worth stepping back to consider whether structure, timing, and tax efficiency are receiving equal attention.
