Why Dave Ramsey's 8% Retirement Withdrawal Is So Dangerous (Hint: Sequence of Returns Risk)
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- Опубликовано: 21 ноя 2023
- This is a follow-up to my video on Dave Ramsey's belief that retirees can start with an 8% withdrawal rate, adjust the amount each year by inflation, and be perfectly fine in retirement. The problem that Dave seems to have overlooked is what is known as sequence of returns risk.
In his analysis, he uses average market returns and average inflation. But nearly 30 years ago Bill Bengen debunked this approach in a 1994 paper. The problem is that two retirees can enjoy the same average returns and inflation yet have two very different results. How?
Sequence of returns. If one retiree enjoys strong markets and low inflation in the first decade of retirement, their financial results may indeed support a higher initial withdrawal rate. In contrast, if the second retiree suffers through bad markets and high inflation during the first decade, they could run out of money using an 8% withdrawal rate in as little as 10 years.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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I think all the financial RUclipsrs need to send Dave a thank you note for giving them RUclips content for weeks, if not months.
Right. Making title using "Dave is Wrong" then their views and comments goes crazy lol.
So true, so many real finance people looked at the 8% and red flagged it, Dave Ramsey does not do his homewrok
Yes, and it doesn't speak well for Dave that he hasn't (as far as I know) corrected -- or even addressed -- this.
Dave Ramsey is not a financial planner. He is a salesman and should be treated as such.
i say he mispoke, but to call him a salesman is a slight - his principles are solid
You should always take with a grain of salt, anyone in the TY financial space that isn't a certified FP or anything else like that. They can say anything and not have it held against them legally. Dave Ramsey or anyone else (Graham Stephen, etc.). They can spat off anything they like without real repercussions.
For example, The Money Guys are, and they must explain things as they would to a client as well as put a disclaimer that they aren't giving individual financial advice. DR and Co. can say literally anything, wrong or right.
@@davido.9180 Principles to get out of debt... yes. However, to invest... no.
@@Brucefulness The Money Guys are legit. Corny, but legit.
And per public perception, the lowest kind of salesperson on the planet. Dave is a real estate agent. Period.
You are always have a level-headed perspective on these topics. Your channel is the most common sense approach on YT that applies to most everyone.
Thanks Rob. I would say your examples were fine, but too kind for sequence of returns. Put in some negative returns in your example, and the effect of sequence would have been more impact full. A positive 6% return is not a bad year in my eyes.
Very true.
Ask someone who retired in year 2000 that took 8% withdrawal how that worked out for them.
Very good point. In my case it took me 8 years to get to where I was after the tech bubble, then the financial crisis hit us all. Then it took me another 4 years after 2008 to get to where I was before then. Luckily I was still working then and putting money away. Now I’m retired but I don’t use my savings in retirement as I have money coming in for my daily expenses.
I can't believe Dave Ramsey hasn't walked his statements back. Thanks for adding this information to the discussion.
Has he ever walked back anything? He is so pompous I doubt he ever has.
The problem is that, very often, the most famous people are also the most arrogant and proud. So, they can't admit their own mistake, because they see admitting one's mistakes as a show of weakness. Either that or the genuinely are so delusional that they think they're always right.
That guy has never admitted he's wrong ever. He's a televangelist, except he went the financial route instead of the church route. You can tell his employees are terrified of him. Talk about "yes men" (and women). Nobody will challenge him. Once in a blue moon when a caller challenges him, Dave loses his mind. Guy is so arrogant it's not even funny.
@@rapfreak7797 Good point.
That really makes me lose tons of respect for him. I once respected his opinion.
Is he really that stupid not to understand sequence of returns? Or is he just an egomaniac that can't admit he was wrong?
There are people that take his advice as gospel. He is going to destroy many lives. I know he likes to proclaim he's a Christian. No Christian would do that to people.
this was a great example! Would have loved to see you include a year with negative returns in your calculations though so people could see what it's actually like when you lose money over a year.
Dave is never wrong, just ask him..🤣🤣
People should watch Dave Ramsey for entertainment and saving tips, not for investing or retirement advice. The Dave Ramsey video also shows what type of A-hole he is, NEVER humiliate a coworker or employee in public. That behaviour ruins the relationship.
Agreed. Once you get beyond Baby Step 2. Look elsewhere. FOO is much better overall.
Great video, Rob! It was very nice meeting you in New York last week at the BlackRock event - Thanks for always sharing great content and insight 💪
This is an EXTREMELY good video. It has very important information for retirees. I'm a DR Coach, always learning and I thank you for explaining this math! In my old age I have learned to LOVE math!
Thansk Rob for putting out this video. I greatly appreciate the spreadsheet explanation. I understood the concept before but have a much finer understanding the problem now. Also, Happy Thanksgiving!
This was great Rob. Keep up with the "Math Nerd" stuff. It really drives home the point.
This is an awesome, awesome video.
Terrific explanation starting with basic concepts then progressing logically to explain the concept.
Many thanks!!
-Amit from Ashburn
Thanks for the great explanation.
@Rob Berger excellent! Appreciate the level of explaining! I’m a math nerd as well!!
Another great video explaining the subject in layman's terms.
Thank you for this. I wish Ramsey Solutions would watch this to correct and clarify some of their positions. I've never quite understood following the Ramsey plan. It's filled with weird absolutes that make less and less sense as I lean into my money.
thank you very comprehensive video
great job, thank you
Think you for the math lesson! Your video was perfectly succint. Happy Thanksgiving!
Excellent presentation,,,reality check!!
Rob, great stuff. Another winner - and gold star for FI Calc. Thanks again - best free online financial advice for retirees / almost retirees.
This is such important information for people who follow Dave Ramsey.
Rob, Thanks for the math lesson. Great vLog
This is a great illustration, Rob, but I think showing a 5-10 year projection and throwing some negative return years in the mix would make the point much clearer.
Great vid! Love the dummy down version for me
Hard to believe you had to explain this to everyone all over again.
Thank you so much for deconstructing the 8%, I knew it was super dicey and this proves it even more.
I dont think this served the purpose you would have liked. I found it to be confusing as to why you withdrew 4% on year 2 and 3, when Dave spoke about 8% every year. Even so, you are still ahead after 3 years, albeit Daves method leaves you with a little less. I think he would say, who cares, it 4k over a few years when you have a million. I think you would have been better served to show the effect over 20 - 30 years instead of just 3, the impact will be more apparent. I understand what you are saying here and I agree, but don't think most people will see it that way in such a short term example. Thanks again Rob.
The maths was good and demonstrated the point. I think showing the first year with negative returns might have pressed the point home more but it is good to point out that just taking 8% + inflation each year is a bit reckless - you might hit a lucky 30 year but equally you could hit a bad one and taking a lower % swings the outcome more in your favour. Thanks Rob.
Since no one can control the sequence of returns, I guess the safest thing to do is save as much as you can, don't over spend.
i think the required 12% assumption is what discredits the 8% withdrawal rate the most.
We had the tailwind of decreasing interest rates since the 1980's boosting pe ratios. Vanguard is projecting something like 4% stock returns for next 10 yrs.
Dave, and others, helped me get out of debt and stay out; live below my means; save💰; become financially stable/secure. I need to learn about living retired. Thank you.
Thanks Rob. I am new to your channel. I am from Canada. Can you suggest a retirement app for Canadians similar to the New Retirement app that you were mentioning.
Thank you for continuing to cover this very important topic.
Ramsey is good for new folks wanting to learn or be better at personal finance. Beyond that is questionable. 8% retirement withdrawal is a little too risky. Especially with people struggling to save for retirement. Thanks for sharing.
I learned a lot in this video Rob, but one thing that stayed true throughout the entire video is that by year 3 your Total was still greater than year 1. Which means that Ramsey in a sense is right, you can take 8% out each year if the average is 12%. Even if it means CAGR is less due to volatility.
It would have been nice to see some negative returns to prove the point that Ramsey was wrong. However I’m glad you made the video and viewers can use a spreadsheet and see for themselves.
Thanks again
Retired 2 years ago. I was hit with sequence of events risks due to 2022 bad market. I never sold one single share. In fact I bought more after paying my expenses. Love my JEPI and JEPQ. Not sure if 4% applies to high yield instruments as you never sell. I’m still planning on sticking to 4% spending rate.
Thank you so much for talking about starting back testing in 1968. There are a lot of portfolios that will die on that hill.
Average 12% returns are not returning any time soon (no pun intended). This math lesson is very good, as with all of Rob’s content, but the last 15 years of extreme government spending has been fools gold for the market.
I thoroughly enjoy your channel, @Rob Berger. Since Dave Ramsey likes to quote scripture and has yet to retract his rant, he should re-read Proverbs 16:18-19 "Pride goes before destruction, and a haughty spirit before a fall. It is better to be of lowly spirit with the poor than to divide the spoil with the proud."
The rest of the returns go to your heirs, while Ramsey isn't correct, saying you can only spend 4% is a little off to since if you do that doesn't the average portfolio that starts at a million finish at 2 million or more?
As a career changer starting out as a financial planner, I've learned so much from your videos. Thank you Rob!
Have you ever looked at an approach where inflation increases are capped at a certain percent? For example, my state pension has a cost of living adjustment annually, bit its capped at 3%. Could a 4% approach adjusted for inflation, actually start at a higher percentage if we applied a cap to the inflation adjustment?
Rob, nice explanation showing why 4% rule is sound. I would like to see you maybe do 5 years and insert some big negative numbers upfront for returns . Chances are you will never have all positive returns in the market. Also people need to understand that they may not match the avg market return unless they strictly invest in a index fund minus the fees. Lastly, could it be feasible to have a plan where you modify your withdrawals based on your returns for the year. Example being, if the market has a good year, you adjust your withdrawal to 6%, then on bad years return to 4% or even below? Just wondering how those would effect the outcomes. I’ve recently retired and live conservatively. I worry that I may be penalizing myself be being too conservative. I feel the market did well this year due to inflation and companies raising prices to compensate, but expect that to change quickly next year.
Rob has an earlier video mentioning those flexible withdrawal strategies, adjusting up or down a little depending on your returns each year. But I think you're right, he hasn't combined that flexible withdrawal strategy with this illustration on the effects of order of returns.
To summarize; Dave was treating average returns like an interest rate. Which you can't do.
Should have shown an example with negative returns in Year 1. That would be crushing.
Hi Rob. I am new to investing. I understand retirement accounts and their tax benefits, but can you explain how a simple idex fund like the S@P 500 in a regular brokerage account works. Basically what taxes I would expect to pay at the end of the year? Thank you.
I would say Dave’s advice is worse than saying that credit card debt is no big deal.
i hear you , and give dave credit - if you follow his ideology you will accumulate enough wealth to worry about the exact withdrawal rate. Most the time when you get to that point you should have a good idea , but i like to see dave walk that back - but let’s not overlook the obvious - follow his financial rules you will accumulate wealth then worry about withdraw rate and 8 is to much … get their first …dave knows financial freedom
Pretty much everyone agrees Dave's take is way too simplistic. However, the 4% rule is also based on an overly simplistic model in that it assumes a fixed annual percentage withdrawal rate. Even the Honest Math website owner said as much. If you have flexibility to tighten the budget in down years, you can have a higher average annual withdrawal rate.
Also, the Trinity study was extremely conservative, so the 4% rate should also be considered extremely conservative.
Joshua Fluke responds to Dave Ramsey with millenial rage. Rob Beger says, "Hold my beer. Just wait until you see this spreadsheet!"
Glad to see a video on SRR, it is not discussed enough but is the biggest risk to outliving your money in the first half of retirement.
I think the problem people have is squaring away percentages and dollar amount and how much you need percentage wise to get whole after a negative return. I like to use easy math. If you have $100 dollars and lose 25%, you're left with $75 dollars. Most people believe you just need the next year to have a positive gain of 25%, but that is incorrect as 25% of $75 is $18.75. In fact, you'll need just over 33% gain to get back to $100. Now if you take that 33% and add it to the negative 25% and divide by 2 you'll get an average arithmetic gain of 4% even though in reality your gain is actually 0% as you are just now back to even at $100. Now imagine you had that 25% initial loss and also took out an additional 8% withdrawal for spending. You can see how quickly a couple of bad years in a row make it very difficult to imakebthe money last. Hope this helps some people start to conceptualize the sequence of return risk.
This is how I think of the topic as well. People are generally bad with math and some concepts aren’t the most intuitive so it’s good to use simple math to show the truth.
@@rapfreak7797
Agreed with everything. Except that it's called *arithmetic* , not math.
@@ArmageddonIsHere😂 fair..
One thing not often discussed with the whole 4% rule is "are you really going to live 30 more years ?" Especially if you retire at 65-67. I know I am not living to 95. I will be lucky to make it till 80. This is based on family history and my own medical conditions. So if I take 20 years as an optimistic estimate - 6% may be reasonable. I believe I have seen online estimates for this life span estimate.
You were pretty generous in your examples Rob. Throw in a -20% in that first year and stretch them ten years, and I bet the difference is drastic.
Excellent. Also, note that in retirement we should probably vary the "Medical Inflation Rate", which is typically higher than CPI. This adds another possible SRR aspect. New Retirement software provides for this-so I include that factor. 8% SWR is deadly. "Money Doesn't Grow on Fees".
I think Dave trying to say is that people using the 4% rule leaves a boat load of money left over when they died.
Nope. Otherwise he would be more supportive of FIRE
Correct….. with the 4% rule you have a 96% chance of dying with more money than you started with. Spend the damn capital…… that’s why we save it 👍
Does this mean that designing a portfolio with the highest return and lowest volatility possible will allow compounding to make you more money over time? Is this what is known as mean variance optimization?
All of Dave Ramsey's "personalities" who aren't calling him out on this awful strategy of withdrawing 8 percent are probably harming their career. They probably won't work for him forever, and they are damaging their long term credibility not calling him out on this dangerous advice, even after they are no longer working for him.
Nobody is allowed to call Dave out on the show. They are all puppets and can never say anything that might disagree with Dave.
I would have loved to see a 3 year plan based on last year’s 8% inflation with -19.6% returns for the S&P 500 as a very real and relevant example. It’s not pretty: effectively reducing the purchasing power of the principal in the first year by 35.6% (19.6 + 8 + 8).
The 4% rule is based on just such scenarios. We've had long periods of even higher inflation with anemic returns before, and those tend to be the ones that limit safe withdrawal rates.
After this rally is the SP 500 over price?
Hopefully the causal Dave R viewer will get recommend one of these videos and it might help them think through the details. I am a big believer in a variable withdraw rate in retirement based on investment returns. Plan on the baseline 4%, but know you can adapt your plan.
Hello, I am new to retirement and have been thinking a lot about a withdrawal strategy. I like your comment on starting with 4% (conservative?) and then adjusting up or down from there. I am also considering taking social security soon so I can lesson what I need to take from my qualified plans. Until the market comes back, I feel like it is wise to start with a more conservative initial withdrawal rate.
Word is Dave is having a sabbatical after his outburst.
I'm sure you already know this but an easy way to show the difference that sequences of returns causes to the ending balance is using the arithmetic-geometric inequality. This is just a mathematical statement that say that for every two non-negative real numbers a and b, sqrt(a*b)
Did Dave not mean the WR must be the avg growth for the past 12 months MINUS avg inflation for that 12 months? (or that is how I understood it) If investment cost is 1% then that must also be subtracted together with inflation.
I'm retired in Cape Town SA and like watching your 15- 30 minutes videos (not the 1- 1.5 hour videos as I fall asleep 😀)
most of those tools focus on historical 30 year periods. that leaves out 1999 and 2000, two of the worst retirement begin years in history. I ran ficalc for a 23 year retirement at 5% withdrawal and ran out of money in both cases. scary.
Dave Ramsey is a real estate agent. He has been successful with his preaching but he has few financial planning credentials other than his experiences.
He deliberately didn't get them so he can say whatever he wants without repercussions. None of the hosts have them.
I would have loved to see some examples of some negative returns, just to see what happens
It would be great to follow this up with a SRR video showing 30 years of returns. It should drive home the point that one is most a risk to market volatility when they are within a few years of retirement. This explains why you should be moving away from stocks as you near retirement age, and also why you should be moving back into stocks during retirement to address longevity risk.
Case in point: Japan economy
Thanks Rob for making this extra effort to warned people.
Great example! As a hedge against the chances of poor market conditions in the first few years of my retirement (20 years away), I'm planning on having at least 2 years worth of living/lifestyle expenses (adjusted for inflation) saved up in a combination of cash and inflation protected low risk securities like TIPS or I-bonds, that I can draw from instead. Do you think this is a good strategy?
if everybody had 3-4 years in a cash bucket ,we would not be talking about sequence of return risk,U could there for be much more aggresive with your investments,and i believe we will have to be.we are heading in to a decade of low returns.i believe balanced portfolios will be back in vogue!Sorry for my spelling,i am better at investing than spelling.
Wow, DR’s 8%’s a popular on YT now. The gift that keeps on giving? 😉 Edit: basic math/financial literacy needs to be taught early even if by parents or family - if they’re able.
I think Dave Ramsey is right. He only left out one thing....... ÷2 ....... minor detail .
Dave Ramsey vs Math - There can be only one winner.
I guess historical reference could give you some peace of mind, but probably shouldn't be relied on. I guess that's why the rule of thumb of 4% is so low, to iron out any of these wrinkles. I guess I'll poke around on one of these simulators and see what happens over a 10 to 15 year period. This is one of the reasons I set up an annuity and coupled with social security to give me a base that we can live on for the rest of our lives. The other savings is really meant to be enjoyed, and I plan on doing that sooner rather than later, but I'm going to have fun doing it. I'm not going to be reckless with the withdrawals but it will be more than 4% for sure. When it runs out it runs out... Of course, there'll be a set amount of cash set aside as well, and it helps that we're debt free. Does this make sense??
You should have shown one more example, if someone had retired in 2000
Ignoring taxes and inflation (which make things even worse) if you lose 10% of your investment this year and gain 10% on the same investment the following year,you don't get back to even but instead have a loss when both years are considered.
As a viewer with both a BS in Math and Computer Science, this was right down my alley. Thanks as always Rob!
Thanks for breaking this one down Rob. This was needed as many have been asking why you just can't take is 8% since the averages show the math works.
8% of the year end value
So think of it as an army. You can’t assume that all the soldiers are up to par and when you send them under the weather soldiers to battle more will be sacrificed more quickly and therefore the whole army size will decrease.
Since 1934 25 year rolling averages of ICA there’s one period where the ending balance was slightly less than the starting balance and the amount taken out was considerably more than the principal sum with 8% of year end value. What are you missing ?
Ramsey's plan COULD work..as long as you had a starting portfoio balance that was ENORMOUS, in comparison to your cash-flow needs, throughout your withdrawl phases.
Just save 30x your annual wage and you’ll be good and able to draw 8%
And thats by investing 15% at 10% roi for 30 years. (About)
I stopped listing to Dave Ramey years ago, after about a week of listening to his radio program.
I love your channel, Rob. Please call Dave and tell him you don’t live in your mom’s basement.
It’s interesting that you only used small figures to prove your point. Imagine if you had used negative 30-50 percent instead of positive 6%. The figures will be devastating and will put some people in some serious trouble. Good video. Thank you. Take care
Taking -50% would probably even make a 4% withdrawal too aggressive.
You can come up with assumptions that will have you in trouble even if you take nothing out. What is the point of doing that? To learn valuable information, or to tell yourself you won a point against Dave Ramsay because you don't like him? Why not run scenarios in which the first year had a gain of 25% - that will lead to an outcome where 4% is ridiculously small. Any scenario is possible. None of us know the future, but it's axiomatic that some people will want to be extremely conservative, and others will be happy to take on more risk. After I saw these videos by Rob I had a look at the Ramsay video, and I did NOT hear Ramsay say that everyone should take out 8%. I heard him say that HE was comfortable at 8% and that if someone wanted to be more conservative they could take out 7% or even less. After a question from Rachel he said even 5% if someone wanted to be very conservative. His main argument was against the fixedness of the 4% rule, and the suggestion that his own colleague had suggested an even more strict 3%. I agree with him on that score. This is not an area where ANY percentage is correct for everybody, because everyone has their own individual spending profile, their own longevity profile and their own risk profile. A fixed 4% is likely to be too conservative, and obviously 8% will be too aggressive for many people. But exactly where people should settle is their own choice. In my experience, the majority of people do not enjoy their retirement as much as they should, because of fear of worst case scenarios, and they end up leaving large sums to others.
It's like giving a drunk a drink.
Has anyone calculated say 2 year treasuries vs inflation over say 20 years? My question essentially is do 1 year treasuries keep up with inflation?
What if every year you rebalanced 50% stocks with 50% cash and took the 4% from cash. Forcing to sell high and buy low should make for more durable long term survivability
Ramsey is more popular than ever since so many financial channels are beating this dead horse.
As a dual high-income super savers since age 23....a big factor of concern is the 32% plus tax rate...and RMD withdraw in the golden years.....I would think taking advantage of the 24% tax rate up to todays $364,000 ceiling regardless of percent....just to avoid that future nightmare...
I’m 100% Roth right now for that very reason. RMDs are a very real risk for those who do a great job saving and/or have decent inheritance expected.
I figure if nothing else I’m buying simplicity and flexibility in retirement to have a large balance I can access without incurring taxes.
@@rapfreak7797 We started The Roth route two years ago, but have 20 years of traditional to manage. A small piece of me do wonder if the government will attempt to change the Roth rules in the future out of desperation …hopefully things will be grandfathered….and you can’t worry about every What-if……..guess this is a good problem to have in the end.
Why aren’t you show market downturns to prove your point, that’s where it is critical 2008 a perfect example
I'm not sure I understand this video.
Your analysis didn't suggest bankruptcy to me. Maybe you should have "run the numbers" for "10 years."
Back in 1987, there was a day referred to as black Friday. Over the years my dad had studied the stock market using the news paper. He had accumulated a large amount of money on a modest income of about 20k before he retired a decade before. On that day, he lost half of his millions overnight. then at the bottom, he got out because he couldn't take it any more. He locked in his returns at the bottom and missed the dead cat bounce. That is an example why normal people do not get the returns of the stock market.
*Black MONDAY
Is there any study were they do 4 percent of the money of the money in the account
So you have a million and you take 40 k. Then it goes down to 500 k. You only take 20 k. Then it goes to 1,5000,000 so you take 60 k
I don’t understand this though. You never dipped below the 1 million on all the combinations.
this tells me Dave was right.
I am glad that this conversation on the 8 percent withdrawal rate is taking place right now.
Live like no one else, so later on you can live like no one else.
Not only is this an excellent explanation but it is also a great argument for owning bonds as opposed to holding only equities. Which is something else Dave recommends to the detriment of his listeners.
There is no good argument for bonds! This is a better argument for having a 3 yr cash bucket where the cash is working for you in a CD ladder. This would allow anyone to ride through a potential downturn n the market, while also having their money properly invested n stocks where they will grow (or recover) 100 times faster than bonds.