Is Dave Ramsey’s 8% Withdrawal Rate Valid in 2024?
Dave Ramsey is a household name in personal finance, known for his straightforward advice and strong opinions. However, his guidance is not always aligned with financial realities. This became evident in a November 2023 broadcast
where Ramsey recommended an 8% withdrawal rate for retirement. Such advice, if followed, could lead many to exhaust their savings prematurely.
During the broadcast, Ramsey claimed that retirees could safely withdraw 8% from their portfolios each year without touching their principal. This assumption is based on achieving a 12% annual return, with 100% of assets invested in “good mutual funds,” and accounting for 4% inflation. However, this perspective overlooks significant risks, particularly the sequence of returns risk, and relies on overly optimistic market performance assumptions.
Understanding Sequence of Returns Risk
Sequence of returns risk refers to the danger of experiencing poor investment returns during critical periods, such as just before or early in retirement. Unlike average returns, the order of returns significantly impacts retirement outcomes. If your investments suffer losses early in retirement, you have less time to recover, which can jeopardize your financial stability. Additionally, withdrawing funds during market downturns exacerbates losses, accelerating the depletion of your nest egg.
The Ramsey Show and the Controversial 8% Withdrawal Rate
On the broadcast, Ramsey dismissed co-host George Kamel’s video that advocated for a 3% withdrawal rate, based on an analysis by HonestMath.com. Kamel argued that a 3% withdrawal rate over 35 years of retirement would leave retirees with a healthy account balance. Even over 45 years, a 3% rate would result in a net-positive balance. Ramsey, however, was vehemently opposed, calling the 3% rate too conservative and labeling the widely accepted 4% rule as unrealistic.
“There are all these goobers out there who have always put this 4% crap in the market. I’m just irate now that we have joined the stupidity…” Ramsey said during the clip. He argued that withdrawing only 4% when investments are making 12% is unnecessarily restrictive and would leave retirees with more money than they need.
The Flaws in Ramsey’s 8% Withdrawal Rate
Ramsey’s recommendation hinges on overly optimistic assumptions about market performance and dismisses the critical importance of sequence of returns risk. While a 12% average return might be theoretically possible, historical data shows that achieving such high returns consistently is highly unlikely. Market volatility and periods of negative returns make an 8% withdrawal rate unsustainable for most retirees.
During your working years, you have the luxury of time to recover from market downturns. You can continue contributing to your retirement accounts, allowing your investments to rebound. However, in retirement, you rely on these investments for income. A significant loss early in retirement can devastate your financial plans, and compounding withdrawals during downturns only worsen the situation.
Longevity Risk and Rising Healthcare Costs
Ramsey’s advice also fails to account for longevity risk and increasing healthcare costs. As people live longer, the challenge of sustaining a longer retirement becomes more pressing. Additionally, healthcare and long-term care costs typically rise in the 70s and beyond, further straining retirement income. An 8% withdrawal rate is unlikely to cover these escalating expenses, increasing the risk of outliving your savings.
Exploring Alternative Withdrawal Strategies
Many financial professionals advocate for a 4% withdrawal rate, a more conservative and sustainable approach. However, it’s important to consider other strategies that might better suit your individual needs and circumstances:
- Income Floor: Establish a baseline income with guaranteed sources such as annuities. This strategy provides stability in all economic conditions, ensuring a steady income regardless of market performance.
- Diversification: Balance growth potential with income stability by diversifying your assets across different investment types. This approach can help mitigate risk and provide a more resilient retirement portfolio.
- Bucket Approach: Segment your portfolio into different “buckets” for short-term, medium-term, and long-term needs. This strategy allows for more flexibility and better management of your withdrawal rates over time.
- Dynamic Withdrawals: Adjust your withdrawal rates based on market performance and personal circumstances. This approach allows for greater adaptability and responsiveness to changing financial conditions.
- Rules-Based Strategies: Follow specific rules for withdrawals, such as the Required Minimum Distribution (RMD) method, to maintain flexibility and sustainability. This strategy helps ensure that you don’t withdraw too much too soon, preserving your nest egg for the long term.
Analyzing the 4% Rule and Beyond
The 4% rule, introduced by financial planner William Bengen in the 1990s, has long been considered a safe withdrawal rate. According to this rule, retirees can withdraw 4% of their initial retirement portfolio, adjusted for inflation, each year without running out of money over a 30-year period. While not foolproof, the 4% rule provides a more conservative and realistic approach than Ramsey’s 8% recommendation.
Recent research suggests that a flexible withdrawal strategy might be more effective than a fixed rate. For instance, the “Guardrails” approach adjusts withdrawals based on portfolio performance, increasing them in good years and reducing them in bad ones. This method aims to provide a balance between enjoying retirement and preserving capital.
Another strategy is the “Floor-and-Ceiling” approach, where retirees set minimum and maximum withdrawal limits based on portfolio performance. This approach helps maintain a stable income while allowing for adjustments in response to market conditions.
Practical Considerations for Retirement Planning
Retirement planning is highly individualized, and what works for one person might not work for another. When considering withdrawal rates and strategies, it’s essential to account for your unique financial situation, risk tolerance, and retirement goals.
- Consult a Financial Professional: Working with a financial advisor can provide personalized guidance and help you navigate the complexities of retirement planning. An advisor can help you develop a comprehensive strategy tailored to your needs.
- Consider Guaranteed Income Sources: Incorporating guaranteed income sources, such as annuities or pensions, can provide a stable foundation for your retirement income. These sources can help mitigate the risks associated with market volatility and longevity.
- Plan for Healthcare Costs: Factor in potential healthcare and long-term care costs when planning your retirement budget. Health expenses can be substantial, especially in later years, and should be accounted for in your financial strategy.
- Stay Flexible: Be prepared to adjust your withdrawal strategy as needed. Flexibility is key to adapting to changing market conditions and personal circumstances.
Diversify Your Investments: Diversification can help spread risk and improve the resilience of your retirement portfolio. Consider a mix of stocks, bonds, and other asset classes to balance growth potential and income stability.
Final Thoughts on Dave Ramsey’s 8% Withdrawal Rate
Dave Ramsey has a large following and has helped many achieve financial freedom, but his 8% withdrawal rate recommendation is flawed and unsustainable. Conservative withdrawal strategies, such as the 4% rule, offer more security and are backed by extensive research. Blended strategies incorporating contractual guarantees, like annuities, can provide additional stability and peace of mind.
If you’re seeking personalized advice, consider reaching out to a financial professional.. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 of contact us here to schedule an appointment with an independent trusted and licensed financial professional.
🧑💼Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here
