Dave Ramsey’s New Advice Will Push Retirees into Poverty

Anyone following his retirement withdrawal strategy is doomed

Ric Edelman: It's Tuesday, December 19th and Dave Ramsey is at it again. A few months ago, I mentioned a class action lawsuit against him over his promotion of a company that promised to sell your time shares - here's the link to that show if you missed it.

Now, Ramsey is involved in an even bigger controversy, and he's got the entire investment advisor community outraged. If you follow Dave Ramsey's advice on this issue, you're going to lose all your money. You're going to be broke in retirement. You're going to be financially destitute. You'll have spent down all of your life savings, and Dave Ramsey will not be there to bail you out. Let me tell you what this is all about. It's called a swipe, a systematic withdrawal plan.

I've been in the financial advisory business for 35 years and forever in this business, I and every other legitimate financial advisor has recommended to our clients that when you're in retirement and you need to start withdrawing money from your investments, you should withdraw no more than 4% per year.

Let me explain why. If you withdraw 4% per year from your money, you're going to be able to withdraw money pretty much forever. You won't run out of money. More importantly, we know that the cost of living rises every year with inflation. We've seen that painfully over the past several years. Right. And that means you're going to want to increase your withdrawals from your account. 

If you withdraw only 4% from your portfolio, your portfolio will probably earn more than 4% so that you can have your portfolio grow in value. And that means you can increase the amount of money you're getting from your account each year through a 4% withdrawal program. This way, your income will keep pace with the cost of living, and you won't be crushed by inflation as you age.

Now, I also hasten to add that this 4% rule isn't really a rule. It's a guideline. Depending on the client's circumstance, you might need to withdraw less than 4% to avoid running out of money, or you might be able to withdraw a lot more than 4% without any concerns. I mean, let's face it, I think Bill Gates can afford to withdraw more than 4% of his money without a fear of running out of it. So depending on your circumstances, determines how much money you ought to be withdrawing. And sure, I can envision scenarios where a given client might be withdrawing 10 or 15% of their portfolio, but they're going to dwindle that account value down pretty darn quick. You need to keep that in mind.

One other piece of fine print regarding this whole concept, if you withdraw 4% from your portfolio, you'll probably be able to maintain the fundamental principle intact. That is, of course, the 11th commandment: Thou shalt not spend principal. 

So investors are happy to withdraw their income, their dividends and their interest from their account. But they don't want to spend down their principal because they don't want to run the risk of becoming broke in their 80s or 90s. So all other factors being equal, a 4% withdrawal rate is an appropriate amount to make sure that you are reasonably safe and you're not going to be suffering bag lady syndrome when you're in your elder years.

Now, it's worth noting that over the past few years, when interest rates fell to zero and the stock market collapsed during Covid, some folks in the financial industry started to say that the safe withdrawal rate isn't 4% anymore. It's even less 3.3%. In other words, many of us got more cautious, more conservative, more careful. The last thing any advisor ever wants to see is any client having the experience that they withdrew too much of their money each year, and by the time they're in their 80s, they discover that they've spent it. All their money is gone. So 4%, that's what you should be withdrawing. Or more recently, like I said, as little as 3.3%.

The way I've helped clients figure out what all this means is really very simple. Take your annual income need. Let's say that you need $100,000 a year in income. And let's further say that you get $25,000 a year from Social Security or pensions. That means you need to get 75 grand from your investments. Take that 75 grand and multiply it times 25. That's $1.9 million.

In other words, if you have $1.9 million in your investments and you withdraw 4% a year, you'll get the 75 grand in income that you need. And because of inflation, you'll want to be able to increase your income every year, and your investments ought to be able to grow that much to accommodate your need. So all good. So whatever your income need is just multiply it times 25. That tells you how big your piggy bank needs to be to be able to support your lifestyle in retirement.

In fact, the Morningstar just issued a new report and it recalculated what it says is the safe annual withdrawal rate for recurrent retirees if you want your money to last 30 years. Morningstar's answer ready for it? You guessed it 4%. Everybody's been studying this for decades, and everybody keeps coming up with the same answer; 3 or 4% is the appropriate withdrawal rate to protect and preserve your money. By the way, Morningstar's assuming you've got 60% of your money in stocks, the rest of it in bonds, a 60/40 portfolio pretty typical for most portfolios that advisors typically recommend.

Now here comes Dave Ramsey. This is the guy whose big claim to fame in personal finance is that he once filed for bankruptcy. His focus has always been on helping people pay off their debts. But now Dave has decided that he's an investment expert, and he's now telling his radio audience that financial advisors who recommend a 4% withdrawal rate are super nerds and goobers who, quote, “Live in their mother's basement with a calculator.”

Really, Dave? I lived in my mother's basement. So if Dave Ramsey says a 4% withdrawal rate in retirement is wrong, what withdrawal rate does Dave say you ought to do? He says, and I'm not making this up, he says you should withdraw 8% per year. Oh my goodness.

Here's his rationale. He said on his radio show, quote, “If you're making 12% in good mutual funds and you need to leave 4% in there for inflation, that leaves you 8%.” That's what he said. And he's crazy. 

First of all, there's no such thing as any mutual fund, let alone a good one, earning 12% every year. Bernie Madoff died in prison for promising his clients 12% a year. Since 1926, the S&P 500 has averaged 10% per year, not 12. That's 20% less than the 12% Dave Ramsey saying you ought to be earning. I've never met any investor, nor any investment advisor who has ever recommended that any retiree have 100% of their money in the stock market, but that's what you'd have to do to get the 10% that the S&P 500 has delivered. And Ramsey is telling people they ought to be expecting 12%.

What do most people do? Well, most people have 50 or 60 or 70% of their money in stocks. The rest of it's in bonds. And bonds don't earn 12%. Not even Dave Ramsey's claiming that since 1926, bonds have earned about 4% a year. Right now you can get 5% with a 60/40 portfolio. You should be expecting a total return of 7% on average per year over long years; seven, not 12. If you get 7% and you allow for inflation, well, that's why we say you should withdraw only 4% a year, not 8% like Dave Ramsey is saying.

And more importantly, don't believe that you can earn 12% a year from your portfolio. If you expect that you're going to get that kind of a return, I guarantee you're going to be disappointed. And if you build your finances around it, you'll be more than disappointed. You'll be broke.

Go ahead and listen to Dave. If you're in credit card debt, he can help you get out a credit card debt. But if you have money, if you have savings and investments, do not listen to Dave Ramsey's investment advice. 

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