Money personality Dave Ramsey has come under fire after going on an epic rant about the popular 4% rule for retirement withdrawals.
It all started when a 30-year-old man who had already saved up $120,000 for retirement called “The Ramsay Show” and asked what percentage of his assets he should plan to take down over 30 years in retirement. It started on.
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The caller brought up something recent. video Shared by ‘Ramsey Show’ co-host George Kamel — Target audience wealthy american youth Planning to retire early — Kamel told viewers to follow a 3% withdrawal rate if you want your nest egg to last more than 30 years.
“I don’t know what the hell George is doing with a 3% withdrawal rate, because it’s absolutely wrong.” Ramsey said.. “ridiculous.”
Instead, Ramsey says it’s “perfectly fine” to withdraw 8% a year from a “high-quality mutual fund,” assuming it returns 12% a year, on par with the S&P 500, which averages an 11.8% annual return. said. % since 1926—and he sets aside 4% for annual inflation.
Ramsey’s retirement advice has gone off like a lead balloon among other money experts, with some calling his 8% withdrawal rate proposal “horrible” and “incredibly dangerous.”
So how do you figure it out worthy of your retirement?
Ramsey’s 8% proposal
For many years, financial planners and retirees 4% rule — a term coined in 1994 by financial advisor Bill Bengen — states that retirees should plan to withdraw 4% of their assets each year, with the allocation increased or decreased each year based on inflation.
But Mr Ramsey slammed the commonly used rules and the “idiots” who preach them, saying: That’s not realistic. You don’t have to live on 4% of your money for your nest egg to survive. ”
Ramsey believes that if you’re only withdrawing 4% from an investment portfolio that’s growing at a compound annual growth rate (CAGR) of 12%, you’re missing out on a huge opportunity.
“Where does the other 8% go?” Ramsey said. “Well, 4% of that went to inflation.” [and] The other 4% is just sitting there, so you’re not making a living investing, you’re growing your investments.I didn’t destroy the nest egg, I didn’t touch it. [it]. You’re leaving 4% and growing your nest egg by subtracting 8% from your 12% growth rate. ”
for a million dollars saved for retirement, Ramsey said you should be able to withdraw $80,000 each year in retirement and “never destroy” your nest egg. He said that telling people that with $1 million in savings they can safely reach retirement income of just $40,000 is “a bunch of bullshit math” by “super nerds” that is “taking away people’s hope.” ”, he said.
At a basic level, his live on-air dropout rate works out to be 8%, but that’s based on a number of assumptions. For example, suppose you invest most (if not all) of your portfolio in stocks. Risky strategies for retirees — This results in a consistent 11-12% CAGR. Not only that, Ramsey also doesn’t mention additional costs such as the management expense ratio (MER) for mutual funds and exchange-traded funds, which typically ranges from 0.5% to 2%.
It is these omissions in his highly virulent attack on the “4% dropout idiots” that make Ramsey’s critics so furious.
What do the critics say?
Dave McKnight, author of The Power of Zero, took aim at Ramsey. Youtube videos There, he said, radio hosts “live in a fantasy world where they think this kind of stratospheric distribution rate is sustainable into retirement.”
The biggest problem with McKnight’s 8% withdrawal rate is that it “doesn’t take into account the volatility of the investment.”
“Just because you average 11.8% per year doesn’t mean you’ll get exactly that result every year, even if that’s possible,” he said. “Ultimately, the order in which you experience your retirement gains is one of the biggest keys to determining whether your retirement assets will last through your average life expectancy.”
Rob Berger, also a personal finance author, makes a similar point in his book. Youtube channel: “Dave is fundamentally wrong. Without a doubt, he is wrong. An 8% withdrawal rate is extremely dangerous.”
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Berger criticized Ramsey’s argument as too simplistic, saying, “I certainly agree with Dave that 12 – 4 = 8, but that’s where our agreement ends.”
In particular, Mr. Berger was uncomfortable with Mr. Ramsey’s suggestion that a retirement portfolio heavily stocked with index funds and mutual funds that track the U.S. stock market could return 12% annually.using a tool called portfolio visualizerhe proved that the CAGR of US stocks from 1972 to 2023 was actually 10.25%.
“It’s important to know which time period you look at,” Berger said. “Even if you look at it over a very long period of 50 to 51 years, you can see that stock returns are less than 12%. What we don’t know is what they’re going to get back in retirement.”
Other Ramsey critics also accused X (formerly Twitter) of foul play for recommending his retirement. caleb hammera personal finance personality focused on helping people out of debt, explained the advice “It’s scary,” he said, highlighting that only 32.5% of people still have money in their nest egg 30 years after retirement.
What withdrawal rate is right for you?
There are a few things to keep in mind when comparing Ramsey’s 8% exit rate to the more traditional, conservative 4% exit rate. I wish money guru Suze Orman would consider even 3%. In this era of economic instability.
Ramsey’s calculations are based on the following assumptions: your retirement portfolio This is unusual because retirees are generally encouraged to move their portfolios away from stocks and toward more conservative investments such as bonds as they age.
It is also important to consider over what time periods sequence risk (which refers to the sequence and timing of declines in investment returns due to, for example, stock market downturns) is likely to have a significant impact. Your retirement savings will last.
Berger points out: “If you have a series of really bad years early in retirement, like stock market losses or inflation, it makes it worse. You can have a series of bad years to begin with, and it’s so bad that you don’t want to retire. It can be dangerous.”
The most important thing to remember is that everyone’s financial situation in retirement is different, so the percentage rule can be a good starting point, but you can also adjust it to fit your situation. If you’re not sure what retirement strategy is best for you, consider the following: Work with a financial advisor Someone who can help you meet your specific financial needs.
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