Dave Ramsey YouTube: Reaction to 8% Withdrawal Retirement Strategy


Dave Ramsey: If you’re making 12 in good mutual funds and the S&P is average 11.8, and if inflation for the last 80 years is average 4%, if you make 12 and you need to leave 4% in there for inflation raises, that leaves you 8. I’m perfectly comfortable drawing 8. The problem is when you go down these stupid nerd rabbit holes in these Reddit threads with these morons who live in their mother’s basement with a calculator, and then you put that out into the dadgum community, and then people go, “I don’t have enough money. It’s hopeless. I’ll never be able to save enough to retire.”

Troy Sharpe: Today, we’re going to explore Dave Ramsey’s recommended 8% withdrawal rate for your retirement portfolio. Now, the truth of the matter is this very well may be possible, but also it could end in catastrophic defeat. We’re going to look at this objectively while providing some commentary and insight so you can understand if you choose to follow Dave Ramsey’s 8% withdrawal rate advice, you can understand what potential paths your retirement could lead down.

Now, what we’re not going to do is hurl any insults at anyone or attack anyone because the truth is we’re not big believers in the 4% rule. We think for many of you, that is underestimating your potential retirement income, and 8% probably is too high. The real answer is somewhere in the middle. We want to explore all of this information, help you make better decisions in retirement. As I said, this is not an attack video. We’re going to be above the fray because we have enough of that in today’s society. We just want to deliver to you good insight, good commentary, and help you make better decisions with your retirement.

Why the 8% Withdrawal Rate is Controversial

First, we want to look at what exactly Dave Ramsey said, and that’s that you can withdraw safely 8% of your principal balances in retirement, adjust for inflation, and not worry about running out of money. This is based on the assumption that you are 100% invested in stocks and that the stock market, your portfolio, continues to average 12% per year indefinitely.

First thing to understand here is Dave Ramsey is not a licensed investment advisor. He has no one he has to answer to. Not the SEC, not any oversight board, no regulatory agency. Dave Ramsey can basically say whatever he wants to say. Conversely, most of those that advocate the 4% rule are academics. Those that don’t have any real-world experience dealing with people and the emotions that come with dealing with people when they retire, have no more paychecks, are starting to take money out, and you see those account balances fluctuate in value, there’s a real emotional element that you have to take into consideration when building a retirement income plan.

The truth is somewhere in the middle. 8% may or may not be too high, 4% may or may not be too low, but you want to have a flexible plan in our opinion. You want to be able to adjust based on circumstances. You want to stay connected. Most importantly, you have to understand what we call your guardrails. Because if you have a portfolio that is 100% equities, and that level of risk is outside your comfort zone, there is zero likelihood that you will stay committed to that plan and you are in quite possibly the worst position possible because you are likely to make a very bad decision, sell everything, go to cash to protect yourself when markets go down.

Understanding Sequence of Returns Risk

For this video, we want to really explore what does this 8% withdrawal rate with 100% exposure to equities, what does that look like, what does that mean for you, and is this something you should really consider following in regards to sound retirement advice. Dave Ramsey’s entire premise is based on the assumption that your portfolio will return 12% per year, every single year. Of course, if you average a flat 12, 12, 12, 12, 12, 12, and you’re withdrawing 8, 8, 8, 8, 8, mathematically, that’s going to work out. There are two concepts in play here. First and foremost, you’ve heard me talk about sequence risk a lot on this channel. I encourage you, if you’ve not watched these videos, just simply Google Oak Harvest sequence of returns risk, go through our channel, you’ll find them.

Market Performance and Its Impact on Retirement

The second concept, though, I’ve not spoken much of is known as the timing paradox. Essentially, the timing paradox says that if you retire at the end of a bear market, you should be able to have a much larger withdrawal rate than someone who is retiring at the end of a bull market. Theoretically, if you retire at the end of the bull market, the next several years could be rough, you could fall victim to sequence of returns risk, but over time, your average rate of return should be much lower than someone that retires at the end of a bear market.

Now, Dave Ramsey talks about it in one of his videos where he and his portfolio in his mutual funds has consistently earned 12% for many, many years. Truth of the matter is, the stock market has outperformed his 12% rate of return over about the past 13, 14, maybe 15 years, because in 2007 to 2009, we had a financial crisis coming out of recession, 2010 to 2024, where we are now, the market has done tremendously well. This is a great example of the timing paradox.

The question you have to ask yourself right now is, where are we on this spectrum? After about a 15-year bull market run, are we on the cusp of a much longer bull run? Is it possible that we’re entering into a bear market or something somewhere in between? To assume the stock market is going to continue to average 12% a year, you’re taking on some pretty big assumptions there with the consequences. If it doesn’t go that way, it would be tremendously dire for your retirement.

Now, I don’t put a lot of weight into stock market forecasts because, historically, they’re not very accurate. It is one little piece of information that we should consider when we’re looking at projected capital market assumptions over the next 10 years. What we have here are stock market forecasts from BlackRock, JPMorgan, Morningstar, various research affiliates, Schwab, and Vanguard. All of these are within about the past six to eight months, and we’re mid-2024 here.

BlackRock says about 5.2% for US equities. JPMorgan is at 7. Morningstar is at 4.6. We’re at 4% for various research affiliates. Schwab is at 6.2. Vanguard puts out a range between 4.2% and 6.2% for US equities. Now, we look over here, we see developed markets, we see emerging markets, and also US aggregate bonds. That’s what the rest of the bar graph here shows. Now, this is just one teeny tiny piece of the pie. History has shown that stock market experts, in quotation marks here, their forecasts typically aren’t very accurate. Again, small piece of information.

For our first case study, we’re going to look on the higher end of those projections. We’re going to look at $1 million invested in large-cap value and large-cap growth, with an average of about 6.8% return. A little bit on the high end, closer to JPMorgan, and the high end of the Morningstar, or excuse me, the Vanguard forecast.

Now, the first thing, before we hop into the case study, is I do want to show you this. This portfolio, 100% equity during the financial crash from November of ’07 to February 2009, would have lost 51%. Taking $80,000 of income on top of that means after year one of retirement, if this were to happen when you retire, you’re looking at $590,000 out of your $1 million being completely gone. At that point, your retirement is facing an existential crisis.

Early Retirement Risks: The Mike Tyson Effect

Mike Tyson said it best. He said, “Everyone has a plan coming into the ring until they get punched in the face.” That’s true. This is you getting punched in the face if the market goes down catastrophically the first few years of retirement. This is the risk. This is what we call your emotional willingness to stay committed to your plan, or this is the concept, because if you’re not willing to stay committed to the plan, you have an investment portfolio most likely that is too aggressive.

Here’s a great example. Right outside of our office is a big section of I-10. It’s the biggest section of I-10 in the country, I believe. I think it’s 20 lanes wide, going in both directions. This portfolio here is akin to that section of I-10, meaning you could be way over here or you could be way over here. If you’re driving late at night and you fall asleep, you could veer way over to this side or way over to this side. That is too large of a variability of potential outcomes for most people in retirement.

We’ve been doing this a very, very long time. While, theoretically, what Dave Ramsey says may be true, if you average 12% per year, 100% equities, you can withdraw 8% without a problem. The reality is, after dealing with thousands and thousands of people and having these conversations, there are very few people in retirement that I’ve ever met that have the emotional ability to stay committed to a plan that’s 100% equities while they’re drawing down the portfolio in retirement. It’s just simply not practical.

Simulation Results: Comparing Retirement Scenarios

Based on a little bit more reasonable forecasted return of equity markets, taking the 8% withdrawal with $1 million, we’re going to run the Monte Carlo, comes in at about 13%. This is not a surprise. If we’re not averaging 12% a year or 8, 9, or 10, it’s very unlikely that this portfolio is going to sustain itself over any length of time.

We do see with the squiggly lines here that some of the green ones are successful retirements. You can actually think of each one of these lines like the multiverse in some of the Marvel movies, right? If you could retire 1,000 different times, all of these are different lifetimes throughout your multiverse. Some of them, it works out really, really well. In the majority of them, it ends in you running out of money.

What I want to do next is hop into different length of times for your retirement, meaning a 30-year, a 20-year, and also a 15-year, and look at higher rates of return at 12%, like Dave Ramsey suggests. What we have here is four different scenarios. This is the one that we just looked at with more realistic capital market assumptions based on where we are today, that timing paradox that I referenced earlier, as well as some of the accepted stock market forecasts from some of the experts out there. Then we have a 30-year retirement, a 20-year retirement, and a 15-year retirement. All of these are averaging just under 12% per year. The software would only let me bump it up to 11.7%, but close enough, and withdrawing 8% of the $1 million adjusted annually with an inflation bump of 2.2%.

The reason it’s 2.2% is because I had to reduce that in order to get the software to allow me to get as close to 12 as possible. Kind of technical, but long story short, 11.7% is the average rate of return here. We can clearly see that even averaging 12% a year in the real world, because in the real world, if you average 12%, you don’t make 12, 12, 12, 12, 12, 12. What you’ve done, if you can average 12%, is you’ve created a portfolio that is as big as the section of I-10 right outside of our office here. You have increased the variability of expected return, which means some years, you’re going to make 40%, 50%, 60%, and, in some years, you’re going to lose 30%, 40%, 50%.

When you look at the real-world potential returns that you would actually realize, and all of that equals 12%, or 11.7% in this case, you create a significantly different outcome from what Dave Ramsey projects, where he’s just assuming 12, 12, 12, 12 every single year. Still, 48%, if you have a 30-year retirement, it’s basically flip a coin. Heads, you win. Tails, you lose. 20-year retirement, 60%. A little better than a coin flip that you pass away with money. 71%, if you have a 15-year life expectancy. All of these are age 64, so you can do the math, 30, 20, 15 from there.

Balancing Aggressive and Conservative Strategies

One thing is certain, if you have 100% equities and you start to withdraw 8% per year, in all of these scenarios, you very well may make it. In all of these scenarios, you also very well may not. The one thing that’s absolutely certain is you are going to have one hell of a ride in the meantime. The question you have to ask yourself, do you want to go on that ride? If I’m a driver and I’m taking you to the airport, and I tell you what that ride is going to look like, and then give you the choice, yes or no, do you want to hop in? That’s up to you.

I’m not saying it can’t work, because I do believe most people take too little money out of their portfolio following the 4% rule. Taking 8% out, you have to get very aggressive. If you get aggressive, do you want to be on that ride? Most people I’ve worked with throughout my career, the answer to that question is absolutely not. Some people, maybe yes.

Now, I want to contrast the Dave Ramsey version versus the real-world version. It’s going to be the same in all of these, but we’re going to go over here, look at details for average returns, combine details. Screen is going to expand. We go up, and then here, we see, start with $1 million. This is the 11.7% average rate of return that I told you. We can clearly see if we average 11.7, we take out $80,000, adjusting up for inflation. If we make 11.7 every single year, Dave Ramsey’s right. We don’t run out of money. As a matter of fact, we have more at the end of the retirement 30 years from now than we did when we began.

Now, what I want to do is show you what happens if you retire with bad timing, meaning we’re introducing sequence of returns risk now, but also with respect to the concept of the timing paradox that I spoke to earlier in this video. We’re going to scroll down here, look at annual returns for bad timing, look at the same combined details. We’re looking at the same spreadsheet, expand the screen. Visually, you can see it doesn’t work out too well, but this is what we’re looking at.

Negative 40% year one, negative 14% year two. We’re going to have to average 16% for the rest of time to get to that 11.7 average. We see, because of the bad timing, again, 100% equity, you’ve created a very wide variability of outcome. If it goes against you, if it lands tails instead of heads, this is quite possible what happens year one, year two of retirement. We see, taking $80,000 out, your portfolio lasts about seven or eight years. That is a situation. It’s one of those squiggly lines and one of the multiverse that we talked about earlier that is possible. You have to decide, are you going to get into that pot?

I want to look at one more thing before we hop into a sequence of returns example, and then we’re going to bring it all together and summarize this video and wrap it up. We’re going to look at these individual trials now. What’s unique about the individual trial model is that when you’re dealing with a 100% equity portfolio, and you have such a large range of potential outcomes, what you do is you really see the impact of or how less important average rate of return is over the sequence of returns.

When your potential outcomes are very narrow, because typically that’s a more conservative portfolio, average rate of return does become a bit more important in the distribution phase. When you have a very large range of outcomes, you could have a very low average rate of return and actually do really well, because if those positive years happen in the beginning, you have enough large gains that you can suffer some bad losses later in life. Maybe that’s a little bit confusing, but we’re going to hop into it here.

This is looking at 1,000 different trials, averaging 14.5%, and we actually see the portfolio still runs out of money in 2050, whereas compared to the earlier one we looked at that averaged 11.7 every single year, it had plenty of money, 1.228, I believe, at the end of that time frame. We have a higher average rate of return, but we actually still run out of money. We come over here to look at better simulations. Let me just scroll around for a little bit.

Here’s what I mean. Now, we’ve averaged 9.37%, but we still have money at the end of the portfolio. This bar graph is your annual returns, but down here, we see this is representative of the value inside your portfolio. Even though the average rate of return here was less at 9.37 than the one we just looked at 14%, we still have 3.2 million in 2053. The reason is, look at the sequence of returns. This is what I was referencing a few minutes ago. Very good sequence of returns. These really bad returns in the out years don’t impact you nearly as much, but they bring the overall average rate of return down.

Let’s look at a couple more. Let’s come over here to some of the worst outcomes. We’re averaging 4.1, obviously, that’s not going to work. We run out of money in 2042. Let’s just look at a few here. That’s 5.29. I want to find a higher one. Here’s 7.16, better than the other ones that we just looked at, but you actually run out of money sooner, meaning the average rate of return is better, but you still run out of money a little sooner. 7.48, money lasts a little bit longer, you can see here. Once the returns stop, I know that the portfolio value is exhausted. One more. 4.66, again, interesting, only averaging 4.66, but the money lasts longer than some of the trials where we averaged 6% or 7%. Again, averages mean far less the more aggressive your portfolio is because you introduce such a wide range of outcomes.

One last thing to show you on this individual trials chart, because I told you it’s going to be an exciting ride if you decide to go this route no matter what happens. Look here. To plan future dollars, so this is broken down into percentiles, so the 99th percentile would be really, really, really good returns over a long period of time, whereas the first percentile would be the opposite. We either pass away with $136 million, or in these other scenarios, zero. Again, it’s going to be an exciting time.

One last thing to show you, because it ties into what we’ve talked about, and it’s sequence of returns risks. I have the table here, we’ve went through this several times, the concept, we have lots of videos on this channel, but it’s something you have to grasp if you’re entering retirement. We just have some hypothetical returns here, and starting with $500,000, withdrawing $24,000 per year. Just under 5%, it’s called about 4.8 or so. A little bit aggressive withdrawal rate relative to the 4% rule, or what some people are telling you to do now at 2.5%, 3%, 3.5%.

Regardless, we have a positive sequence of returns, where the timing of your retirement dictates that, or doesn’t dictate, but ends up resulting in very positive rates of returns over most of the beginning years in retirement, and throughout retirement, for that example. We end up with 1.32 million, starting with $500,000, and withdrawing this $24,000, adjusting upwards for inflation. Average rate of return is 8.58%. Total withdrawal, 730.

We look at the same $500,000, the same withdrawal, but now what we’ve done is we’ve flipped those returns from the chart we just looked at, we just flipped them on their head. The ones that happened at the end now happen at the beginning. We have these reds at the beginning, negative 9, negative 12, negative 22, we have a series of positive years, series of positive years, but we see we run out of money. right over here, about 17, 18 years into retirement, and we have a deficit. Same average rate of return, same total withdrawals, but because of the timing, the outcome is completely different. It’s important to grasp the sequence of returns risk, because again, if you take Dave Ramsey’s advice and you go 100% equities, 8% withdrawals, you’re choosing to get into a car that goes pretty fast, and it could turn out very, very well for you, but it also could turn out completely catastrophic.

Many advisors tell you to withdraw 3% or 4%. Dave Ramsey’s telling you that you can safely withdraw 8%. The truth of the matter is, it’s somewhere in between. This is where we talk about having a custom retirement income plan, because it’s quite possible that you can, not just possible, but likely, that you would be plenty okay withdrawing 5% or 6%. Here’s the caveat. You need to be flexible. You need to understand what your guardrails are, because the biggest mistake that you can make is having an investment portfolio that would lead you to have performance outside of your comfort zone, and then you panic, you sell everything, you blow the entire plan up, and whatever withdrawal rate you started out with planning for, now that’s completely blown up.

Have a portfolio that’s within your guardrails. Stay connected to that. Be willing to adjust your income up or down. If you make 20%, 30% in the market, sure, take out more. That’s essentially a form of rebalancing the portfolio. If you sell the equities, bring it back in line with your comfort zone. If you have a year where you have less performance, maybe you lose 10%, 15%, 20%, maybe you should consider turning down or taking less income from that portfolio. Don’t make rash decisions when the market is down. That’s why we want to stay connected to the plan, so you can see how your plan is impacted in those types of scenarios.

How Social Security Affects Your Withdrawal Rate

Two more considerations here that we didn’t touch on in this video, but they absolutely impact your retirement income plan. You’ve got Social Security. When are you going to take it? You and your spouse, if you’re married. Then, do you have maybe a 7% or 8% withdrawal rate from ages 62 to 67? Turn Social Security on to fill that gap, and now your portfolio withdrawal rate drops to maybe 2% or 3%, or maybe 1% or 2%. Taking Social Security into an account is very, very important.

Then the second thing here is taxes. When most of you have your money inside of that tax-infested retirement account, that impacts your withdrawal rate as well. That’s something that Dave Ramsey absolutely overlooked in that video because the taxation on the withdrawals from your 401k or your retirement account significantly reduced the amount that you can comfortably withdraw because so much of it is going to the government.

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