Financial guru Dave Ramsey continues to stir controversy and advises that many think only the wealthy are equipped to do so. This time it is his pension rule of 8%. On an episode of “The Ramsey Show,” Ramsey rails about the “idiotic” advice that financial experts tell people to withdraw just 4 to 5% of their investment portfolios.
Ramsey believes retirees can safely withdraw 8% of their portfolio’s starting value each year, adjusted for inflation, without depleting their principal. However, many critics are almost unanimous that this advice is unrealistic and potentially dangerous.
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The main criticism is based on the assumption that retirees have a consistent annual return on their investments of 12% and that average annual inflation remains at 4%.
Although the average inflation rate has remained just below 3% over the past decade, higher inflation trends have occurred in recent years (7% in 2021, 6.5% in 2022 and 3.4% in 2023) due to global events. So it may be risky to expect inflation to remain at 4%, given the unpredictability of the current global economic environment.
Many also argue that Ramsey’s approach is “out of touch with reality,” noting that an 8% withdrawal rate is unsustainable for most retirees due to stock market volatility and historically lower average returns. With the S&P 500’s average return of about 10.5% (or 6.6% adjusted for inflation), achieving a consistent 12% return seems unlikely.
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Ramsey’s rule also assumes that retirees have accumulated substantial savings, which is not the case for the average American.
According to Vanguard, the average retirement savings Americans currently have are:
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Ages 25-34: $30,017
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Ages 35-44: $76,354
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Ages 45-54: $142,069
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Ages 55-64: $207,874
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Ages 65+: $232,710
Under Ramsey’s administration, a retiree with $232,710 would take out $18,617 in his first year of retirement. Combined with the average monthly Social Security benefit of $1,776.73 as of April 2024, this amount may be insufficient to cover living expenses for many retirees.
Financial experts are wary that this advice could lead to retirees outliving their savings. Relying on an 8% withdrawal rate can create significant financial strain if investments underperform or if there are long periods of inflation during retirement. Furthermore, investing 100% in stocks exposes retirees to significant market risks, especially during economic recessions.
This doesn’t mean that following Ramsey’s advice is impossible. For those who have a significant investment portfolio, especially in the decades before retirement, this advice can significantly improve their financial future.
However, most financial experts are more cautious and less idealistic than Ramsey when it comes to their clients’ portfolios. They emphasize the importance of a diversified investment portfolio while adopting a more conservative withdrawal strategy to ensure financial security during retirement.
The best approach is to take into account one’s unique circumstances. Talk to a trusted financial advisor to help you determine the best withdrawal rates and investment options based on your individual needs and situation.
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This article Dave Ramsey’s 8% Retirement Rule Gets Pushback – Critics Say He’s ‘Deeply Wrong’ originally appeared on Benzinga.com
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