November 12, 2023 – If I wanted to comment on every piece of bad advice in the personal finance community, my quiet, relaxed early retirement would be busier than the corporate career I left in 2018. So, I usually stay out of the daily Twitter/X spats. Last week, though, an incident caught my attention, and it was egregious enough that I weighed in. In a recent Dave Ramsey show (original video here, starting at the 1:13:50 mark, Twitter discussion here), Dave doubled down on his recommendation of the 8% safe withdrawal rate in retirement, calculated as 12% expected equity returns minus 4% inflation (his numbers, not mine – more on that later). And several people pinged me and wanted me to comment. Safe Withdrawal Rates are my wheelhouse, given that I wrote a 60-part series looking at the topic from almost every angle I can think of. So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way. Let’s see why…
Crazy 1: Historical, real average stock returns are lower than 8%.
Dave is wrong on the S&P 500 average returns. I’ve pointed that out in my 2019 post, “How to Lie with Personal Finance.” The arithmetic average of annual returns will consistently and substantially overestimate the average compounded portfolio returns. For example, if you invest $100 and your returns are -20% in year one and +40% in year two, then Dave Ramsey’s average return would be 10%. But your portfolio will drop to $80 in year one and then jump to $80*1.4=$112 in year 2. So you’re $9 short compared to your compounded $121 portfolio value had you realized 10% average returns. The significant recovery in year two only applied to the smaller portfolio of $80, not the full $100 starting capital. So you’re missing out on $20*40%=8$, plus another $1 from the compounding of the 10% over two years.
It is a general insight from basic math and statistics that the higher the volatility of returns, the higher the drag from this effect. With a standard deviation of S&P 500 annual returns of between 16% and 20%, we’d expect the portfolio’s true compounded annual growth rate (CAGR) to be between 1.25 and 2.00 percentage points below the arithmetic mean. Please check out the money chimp calculator to compare the naive arithmetic average and true CAGR. For example, between 1871 and 2022, the arithmetic average was 10.81%, but the CAGR was only 9.16%, i.e., 1.65 percentage points lower.
Adjusting for CPI inflation, I calculate an average return of 6.72% in the S&P 500 for 1/1871 to 9/2023, with dividends reinvested. Significantly below Dave’s 8% number. People have repeatedly raised this issue with Dave, and he usually responds with ad hominem attacks like, “You’re a dumb math geek who knows nothing about money and you live in your mom’s basement.” OK, who will tell Dave that the Stacking Benjamins show’s “Mom’s basement” shtick is not real? It’s just for show, man!
Crazy 2: Dave Ramsey wants you to hold 100% equities in retirement.
Another piece of crazy advice is that Dave suggests you keep your retirement portfolio in 100% equities. It’s certainly true that a 100% equity portfolio gives you a high average return. 100% equities may work well while accumulating assets; see my post on optimizing pre-retirement glidepaths. However, a 100% equity weight creates an unpleasantly high portfolio volatility, which is particularly dangerous in retirement due to “Sequence of Return Risk.” Therefore, most financial advisers recommend between 20% and 40% of diversifying assets (e.g., intermediate Treasury bonds) during retirement. For example, in the chart below, I plot the withdrawal rates over 30 years (assuming capital depletion) that would have generated specific failure probabilities. 0% is the failsafe, i.e., the highest withdrawal rate that would have succeeded in sustaining a 30-year retirement. The values at 1% would generate a 1% failure probability, etc., all the way to the median, where you would have made it with a 50% probability.
With the 75% equity portfolio, you can raise the failsafe, even though the median outcomes in historical simulations will undoubtedly suffer a bit from the smaller expected return. But also note that too meek of a portfolio (e.g., 50% stocks and 50% bonds) will do consistently worse than the 75/25 allocation. So, from a safe withdrawal planning perspective, there is a sweet spot in the stock vs. bond diversification spectrum. Keep enough bonds to take the edge off the highly volatile equity portfolio, but keep the bond allocation low enough not to torpedo your long-term average real returns.
Crazy 3: An 8% fixed withdrawal rate would likely not survive a 30-year retirement.
Let’s put the Dave Ramsey claim to the test. I use my Google Sheet (see Part 28 of my Safe Withdrawal Series for instructions) and assume:
- 100% equities.
- A 0.05% annualized expense ratio.
- A 30-year horizon.
- Capital depletion, i.e., the final portfolio target is $0 or more. Later, I will also use the even tighter constraint of capital preservation, i.e., you succeed only if the CPI-adjusted portfolio value stays above the initial level.
- No supplemental flows.
- Withdrawals rise in line with CPI inflation.
I display the historical simulation results in the table below. This is the standard output in my Google Sheet. Each row is for a specific withdrawal rate: 2.75% to 4.25% in 0.25% steps. I also added 6.5% (roughly the average real equity return) and Dave Ramsey’s 8% rate. Each column is for a different simulation history subset. We can look at all historical cohorts since 1871—or only cohorts since 1926 (the starting point of the Trinity Study). And then also slice by equity valuations: a) the Shiller CAPE below 20 (i.e., equities are historically relatively cheap), b) the CAPE above 20 (equities are relatively expensive), and c) the CAPE above 20 and the S&P 500 index at its all-time high.
Let’s look at the failure probabilities: With the 8% withdrawal rate, you have an overall failure rate of about 56-61%, depending on the simulation start date. Even when the CAPE is below 20, you still have a less than 50% success rate. Conditional on the CAPE being above 20, you have only a pathetically low 3% success rate.
What’s the verdict here? Given today’s elevated CAPE ratio, Dave’s advice will almost certainly wipe out your portfolio. As of Friday, November 10, 2023, the CAPE was 29.48 (traditional Shiller CAPE) or the more historically comparable 24.34 (see my post, Building a Better CAPE Ratio for more details on the adjustments I implemented). You can all but guarantee to run out of money using Dave’s recommendation and assuming future equity returns follow a similar pattern as during the past 150 years.
Also, notice that the unacceptable failure probabilities are not just due to Dave Ramsey’s slight miscalculation of average returns. Even using a 6.5% withdrawal rate, just under the long-term average real equity return, you’d run out of money about 37-40% of the time unconditionally. And 77-78% conditional on the CAPE above 20. And even with 4.00% to 4.25% withdrawal rates, you’d still generate mostly unacceptable failure rates in the double-digit percent range once you account for expensive equity valuations. Sequence Risk is a real headache!
Case studies
Maybe the 8% Rule can still work because all the historical failures are simply due to running out of money after 27 or 28 years. So you could still be safe for most of your 30-year retirement. But that’s not the case. Here are the five stereotypical sequence risk victims starting retirement right at the market peak before big bear markets.
- 8/1929, right before the Great Depression.
- 11/1968, before the start of stagnant equity markets in the late 60s.
- 12/1972, at the market peak before the first oil shock.
- 8/2000, at the Dot-Com market peak.
- 9/2007, at the peak before the Global Financial Crisis.
If we track a hypothetical portfolio value time series, $1,000,000 at the beginning of retirement, then $80,000 in annual budget (modeled as $6,666,67 in monthly withdrawals), you would wipe out your portfolio well before the end of your 30-year retirement. After less than six years during the Great Depression, after around nine years in the 1968, 1972, and 2000 cohorts and about 14 years for the 2007 cohort.
Crazy 4: Preserving your capital is even less likely
If you thought Dave’s claims couldn’t get any crazier, note that he stresses in the video that your portfolio will not just survive with an 8% withdrawal rate, but you will even preserve your capital. So, let’s put that claim to the test and calculate how likely it is to maintain the portfolio value plus CPI after 30 years. Please see the table below:
The unconditional failure probabilities now rise to about 76% (all cohorts) or 71% (cohorts since 1926). Conditional on an elevated CAPE ratio, you have a big, fat 100% failure probability. So, historically, in retirement cohorts with similarly valued S&P 500 CAPE ratios, there hasn’t been a single cohort that was able to preserve the portfolio’s purchasing power after withdrawing 8% in the first year and adjusting withdrawals subsequent withdrawals for CPI inflation.
Crazy 5: An 8% variable withdrawal rate is not very useful either!
Maybe we misunderstood Dave Ramsey. Perhaps a way to salvage that unmitigated disaster that his advice would create in your retirement is to assume that we withdraw a variable 8%. So, imagine you start with a $1,000,000 portfolio and withdraw $80,000 in year 1. Imagine further that the portfolio falls to $800,000 at the beginning of year 2. Now, you only withdraw $64,000, equal to 8% of the new portfolio value, instead of the $80k plus CPI. The advantage is that we’ll never deplete the portfolio down to zero. But we could certainly suffer painful cuts in our portfolio value and thus the purchasing power of our retirement budget.
Let’s look at the unconditional distribution of withdrawals of that $1000000 portfolio using the 8% variable withdrawal rate. We start at $80k p.a., and then, due to the volatility of the portfolio returns, the realized historical portfolio values and withdrawal amounts fan out, as in the chart below. Noteworthy, some cohorts even raise their withdrawals due to outstanding returns. The 90th percentile stays above the $80k mark for 30 years. But the median slowly drops to below $50k, and the 25th and especially 10th percentile sustain substantial budget cuts, down to about $30k and $25k per year toward the end of retirement.
This strategy is unworkable for most retirees without the flexibility to cut their retirement budget in half. Also, for longer horizons, you will only exacerbate the spending cuts. So, FIRE enthusiasts with a 50-year or even 60-year horizon must keep cutting their retirement budget even more.
But it gets even worse. If we now focus on the historical cohorts with similarly richly-priced equity valuations, we get the spending distribution chart below. The median retirement budget is now at only $18k, almost 80% below the initial. Even the 90th percentile is down to under $25k p.a. The 10th percentile has wiped out over 90% of its portfolio and retirement budget, with a final value of only about $6,400 p.a.
Summary so far
You’re asking for trouble if you use an 8% initial withdrawal rate when equities are moderately overvalued (CAPE>20, as they are today). Historically, you would have run out of money if you withdrew a fixed amount. Or you would have melted down the portfolio after 30 years to a degree that you’d have to live on severely constrained terms. I would not recommend this retirement strategy to anyone I know and care about!
Attempting a diagnosis
Don’t get me wrong. Dave Ramsey provides some good content. Folks in debt have benefited from his tough talk and gotten their finances and often their lives back in order again—credit where credit is due. I also don’t think Ramsey is pushing his 8% Rule advice out of malice. If I had to diagnose the problem, Ramsey is the poster child of the Dunning-Kruger Effect. It’s a cognitive bias established in numerous empirical studies whereby people are often overly confident about their abilities, especially when they have only very shallow subject knowledge. At that point, you’re on top of “Mount Stupid,” see the diagram below. With more experience, you will recognize your shortcomings and blind spots and tread more cautiously. Only later you’d gain more confidence and actual expert status. Also noteworthy, even experts remain relatively humble, and their confidence remains below the Mount Stupid level.
The Dunning-Kruger problem often surfaces when people pick up a few fun and intriguing insights here and there and believe they’re now subject experts. For example, Dave Ramsey knows a thing or two about finance, like average equity returns and inflation rates. He likely has a lot of deep subject knowledge in entirely unrelated areas of personal finance. But he has never run a single safe withdrawal rate simulation in his life. He is not familiar with Sequence Risk. He doesn’t know what he doesn’t know. And what’s worse, he doesn’t even want to learn more and brushes aside every critic who points out his fallacies. In the video, his daughter Rachel points out that the 4-5% Rule isn’t “that stupid” (around the 1:17:27 mark), but Dave just completely bulldozes over her, and she backs off and goes with the program afterward. So, the tragedy here is that Dave Ramsey seemingly wants to stay at that “Mount Stupid” level. And it’s troubling that he calls other people stupid for noticing!
Most people going through this Dunning-Kruger cycle will eventually acquire more experience and expert knowledge. I indeed went through this cycle during the last ten years planning for early retirement, starting with enthusiasm and overconfidence. Then doubts crept up once I looked into the rabbit hole of safe withdrawal rates, noticing that the Bengen and Trinity Study work shouldn’t be applied to all FIRE folks. Bengen and Trinity only talk about unconditional failure/success probabilities, completely ignoring equity valuations. But with more research, I gained enough confidence to retire comfortably in 2018. I don’t argue that I know everything. Quite the opposite; I might be a moron, too, and I got a lot more things I want to understand. I just try to be a smaller moron than Dave Ramsey.
Dunning-Kruger is everywhere!
And, of course, my blog post here wouldn’t be complete without offending some of my fellow FIRE bloggers. Before we unload too much on Dave Ramsey, remember that the Dunning-Kruger Effect is also alive and well here in the FIRE community. For example, the following (paraphrased) claims are circulating in our community:
- You can take your withdrawal rate to 7% if you’re flexible.
- If your portfolio survives a 30-year retirement, it also survives the next 30 years. We can use the Trinity Study results and use them for early retirement.
- The 4% Rule can’t fail if we raise the weighted dividend yield to 4%.
- … and many more.
Like Dave Ramsey’s crazy rant, all these claims are the product of the Dunning-Kruger effect. They are based on folks casually reading a Jack Bogle book and/or the Trinity Study and making up some additional sh!t on their own, without ever bothering to answer basic questions like, “How deep of a budget cut would that flexibility entail?” or, “how long do you need to stay flexible?” etc. Or “Why would higher dividend yields automatically boost returns?” The appeal of writing what people want to hear, confirmation bias, and the tendency of blog posts to go viral when using overly optimistic estimates for withdrawal rates are all around us.
Conclusion
To wrap up, I liked my first-grade teacher back in Germany. She was a significant influence at that time in my life. I never felt the urge to reach out to her while working on my doctoral dissertation in economics or preparing for early retirement, though. If she had reached out to me and offered advice and told me that I shouldn’t listen to the math geeks around me, I would have politely told her to stay in her lane. Similarly, most of us in the FIRE community have graduated from Dave Ramsey. Or even better, many of us, myself included, never even required his services. We should all safely ignore his 8% withdrawal rate advice now. But I feel sorry for the Ramsey listeners. I hope they are smart enough to get a second opinion elsewhere before implementing his crazy, unhinged advice. But, for the love of God, please stay away from Suze Orman!
Dang, just when I thought I was ready to retire on 8% you come in to let me know I’m only halfway there 🙂
Haha! Sorry to deliver the bad news! 😉
“But, for the love of God, please stay away from Suze Orman!” Lol.. keep up the entertaining and enlightening posts!
Thanks. Had to put in that zinger about S.O. at the end. 🙂
Thanks for your good analysis. You are definitely a smaller moron than Dave Moron. On the moron scale, you are not Big ERN, you are miniature ERN.
Yeah, that’s a place where you don’t want to be the big guy! 🙂
As always I appreciate your level headed and data driven approach here.
It’s very easy to make mistakes and try to take shortcuts on your way to retirement.
Because it sure as hell beats working, but you want to get it right. It’s too important!
Yeah, it’s easy to forget about volatility and simply set WR=return-inflation. Shouldn’t happen to a financial expert with DR’s status and reach, though!. 🙂
I enjoyed that. It’s good to use extreme examples as an excuse to review the basics. I have failed in the past to convince some very confident friends and family members that they may be overly confident with their assumption that “with equities giving 10% per annum I can safely take . Their eyes glaze over at sequence of returns and their beliefs are unchanged by reason, I guess that’s the nature of faith versus fact. To be honest I have failed to overcome various beliefs with overwhelming data:
1. you can pick winning fund managers and succeed as their are winners
2. outperformance persists
3. high fees don’t matter because of 1 and 2
4. all equities makes sense in retirement due to higher average growth
5. stock picking works for my pal so it will work for me
6. my pal down the pub misses crashes by stepping out of the market so I’ll do it (I’ve done this myself but know that there are plenty of times since then when my instincts would have made me try to repeat this trick and I’d have missed out on a rising market).
I am trying to stop changing people’s minds as I have no skill at it and people are irrational creatures who use rationales to post-justify what their lizard brain urged them to do.
Thanks for sharing that. All good points. It’s amazing how little the general public knows about this stuff. I will keep trying to get the word out. But it can be frustrating, as you describe.
There’s quite a bit of research out there on combatting misinformation in general and that might be worth a look see… for example, the backfire effect exists, where a person will actually become more entrenched given more information counter to their initial opinions or views. The more emotional weight or the more a person’s persona is tied up to a particular belief (eg in politics or with DR the fact that he makes his living off simple and easy to digest tidbits).
For the 8% thing, I’ve usually been successful walking people through a scenario where the market/portfolio drops 40% in year one and 20% in year two then yields 12% thereafter (all nominal). Throwing this into excel mobile is startling to most (as after 30 years the 8% WR gets a port value of around -$6.5MM… yea that’s negative). Dropping this to a 3.5% WR flips that into about a $5MM port after 30 years. Usually this is enough to show at least that 8% is crazy.
Anyway, check this out for a good handbook on debunking misinformation:
https://skepticalscience.com/the-debunking-handbook-redirect-page.shtml
Thanks for sharing. I can’t really prove or disprove any of the psychological research. It’s possible that a small percentage of the population hold such strong, entrenched beliefs. But most reasonable people should be receptive to the truth. Especially open-minded folks in the FIRE community.
I like the idea of having a Sequence Risk worst-case scenario ready to show. I will prepare one myself.
I do have your SWR toolbox on my one drive and can access it from mobile but that’s a bit much for most people right out of the gate 🤪.
More so… and this is a bit off topic, I think having some sense of cognitive bias such as this is good to try to minimize or eliminate from our own thought processes. I work with a lot of smart people and not all of them have gone through trying to formalize their thought processes and it shows. It is something over and above being educated or naturally smart IMO.
Yes, all good points! Happy Thanksgiving!
Sorry I didn’t see this earlier but I hope you had a good thanksgiving as well.
Awesome, as always, BE! Just one post on Suze, please. Cheers!
Well, I did write one post on Suze here:
https://earlyretirementnow.com/2018/10/15/suze-orman-vs-fire-movement/
And this one on Financial Samurai, a Suze surrogate:
https://earlyretirementnow.com/2020/08/31/the-half-percent-safe-withdrawal-rate/
Have you considered using a tiny amount of VIXY and BTAL plus some managed futures to better the performance of a 70% spy, 30% VGIT portfolio?
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2bD6ujtZsQabYjVuTR3ptY
As your simulations show, the annualized return is lower. Of course, you also have less volatility. No idea how this would have worked out in 2000-2003 or 2007-2009.
Both ETFs have very high expense ratios. Maybe it would help to implement yourself and save the 1-1.5% expenses.
The problem with all these long-vol strategies is that they have a negative expected return. So, you’d hope that the correlation is low enough to compensate for that.
I do options trading (put writing) and add a substantial amount of alpha that way. That’s a more reliable way to supplement returns. But it’s not everyone.
https://earlyretirementnow.com/2023/01/09/passive-income-through-option-writing-part-10-year-2022-review/
I just wanted to say that as someone who doesn’t deep dive heavily into the math (I have a constant source of indexed-to-inflation income) I do appreciate reading your posts. I think it’s super important that someone out there is running the numbers aggressively to show that there are risks to listening to standard advice. Everyone needs to explore their own situations and not just listen to pundits.
I have a particular loathing for DR and SO but they are the general entry point for most people trying to reduce debt and get their money in check. I just wish they wouldn’t say anything unless they were absolutely certain that it was decent advice. 8% is just so wild to me and dangerous to people who see him as an expert.
Great stuff, thanks!
Thanks for the kind words!
And good point noticing that these two clowns, as bad as some of their advice might be, will hopefully bring more folks our way, into the FI and FIRE community. Once folks notice the suboptimal advice and graduate from them!
Excellent article! I actually built my own back testing tool to test Dave’s wild theories over the last 95 years and I came to very similar conclusions. His method is unreliable, at best, and catastrophic in some situations. Terrible Take!
The S&P500 average for the S&P 500 since 1929 has been 11.75% which analyzes out with volitility is 7.9% after volatility is accounted for I’m wondering if Dave just got his brain stuck on this near 12% figure or what but he is way off base
Funny think is, he referred to the money chimp site himself at some point. I thought that it is quite clear on that site that the CAGR is the true average and the arithmetic average is just for reference. How a self-declared finance expert can mix them up is hard to believe.
As always, top quality content with a bit of humor sprinkled in.
That’s the way I roll! Thanks for the feedback and glad you liked it!
Big ERN,
Love your approach to debunking the marketeers of financial advice. The data shows what happens and you tell the story with clear logic and a bit of humor. Keep up the great writing.
Thanks for kind words! Glad my regular readers enjoy this type of post!
Brilliant! Thanks!
You are too kind! Thanks!
8%….lol … man, I don’t know who really listens to Dave Ransey these days. He might have been useful back in the days when he wasn’t a media puppet but nowadays it’s just a ********* . Him and Cramer are a disservice to the financial world !
Haha, that’s a good one!
So, is Dave Ramsey the Jim Cramer of personal finance? Or is Jim Cramer the Dave Ramsey of stock picking? Maybe both!
Hi Big ERN,
Do you have a calculator you could recommend that gives meaningful output to different scenarios? Your posts are always way too high level for me to understand, but I respect your approach! I just want a way to implement your teachings for lay people. I’ve used FIRECALC (firecalc.com) and wonder what you think of that. Thanks!
firecalc is good. cfiresim is good as well.
I stopped using them after I built my own tool. But they are OK for beginners.
Thanks so very much in applying both logic and math to retirement. I consider you an authoritative SME on this subject. Please don’t stop your posting!
Thanks for the kind words! WIll do!
Someone else in a comment thread somewhere pointed it out, but if you’re just going to assume a guaranteed annual 12% nominal S&P return, then much of Dave’s other advice, like “pay off your house”, no longer makes any sense. Why are we paying down 5% mortgages Dave, when we can get 8% after inflation year after year so easily?
I feel bad for his daughter. She looks like someone who has grown up w/ an overbearing narcissist. I realize some people with debt have benefited from some of his work, but I find his entire demeanor off putting.
Yes, that’s a great point. It’s a huge inconsistency to claim that stocks return 12% for sure but then he wants people to pay off 4 or 5% mortgage debt.
Thank you for everything you do. Top notch.
I do have a thought experiment I’ve been mulling over. Your current tool uses US historical returns – which I would call the “Triumph” scenario for the 20th century. Have you ever thought of populating the tool with the data from the UK – to get a “Decline” scenario for the 20th century? Or with the data from Russia/Germany/Japan – to get a “Catastrophe” scenario?
Thanks again,
Kevin
IIRC it’s not just US returns. I think it includes World Ex-US equity returns? I’m in the UK and I always model my portfolio with 40% ex-US stock to keep it in line with the global index funds I use.
Correct: international means MSCI World ex-USA.
But with monthly returns only since 1970.
After 1970, its USD-denominated, though, not their local currency.
I don’t have monthly real return for any of those countries. If you have access and can share please let me know.
That said, I don’t think Russia/Germany/Japan are useful unless you believe that the USA will go through a similar scenario, i.e., communist revolution or losing a war and total destruction.
Thank you so much for your hard work, intelligence, and excellent math. I’m a relatively new reader and I’m wondering if you have a calculator that will help me with the following. I’m a Neuroscience professor (50yrs old) considering retirement from academia in 3-5 years. However, I also have a professional speaking/consulting business that brings in a nice amount of money. What I think I’m looking for is a calculator that allows me to input the expected 1099 income from my business across 3, 5, 7, 10 years (b/c I’m not sure how long it will last once I’m out of academia and want to be conservative). This additional income should help me get past sequence of return risk, or at least ameliorate it to a degree where I’m comfortable pulling the trigger. Is there a highly regarded calculator you’d recommend so I can run these simulations? Thanks again!
In my SWR Series, Part 28 I link to my Google Sheet.
You can enter those supplemental cash flows monthly in the appropriate space and see how much of a difference that will make in your SWR analysis.
30 years ago, the only way to get financially literate was to read books from the library or purchased from your local bookstore. We all shrugged our shoulders and said if they don’t want to do the reading they don’t get the rewards. Also it didn’t matter because there were pensions.
Now, the underfunded libraries can’t refresh their shelves and the local bookstore is long gone. Now everyone gets their information from “influencers” who tend toward narcissism and who pull stunts to gain clicks and “followers”. Now most people must DIY their retirement and they will succeed or fail based on the financial literary they can obtain from a system built on the concept of clickbait.
Obviously a lot of people are about to lose the game. What do you think about the implications of millions of people being unable to retire, retiring into poverty, looking for someone to blame, etc? It’s as if an entire generation climbed “Mount Stupid” and they’re about to fall off the cliff on the other side.
Well, we’re fighting an uphill battle. The best we can do is to offer good unbiased advice and hope that the word gets out to the largest number of people. The side effect is that for those of us who did find the financial red pill will do well because our stock portfolios will create profits from the overconsumption of the rest of population.
Great analysis as ever. Thanks for the work. Is the answer to why he is pushing 8% not the following.
Upton Sinclair 1878–1968. American novelist and social reformer. It is difficult to get a man to understand something when his salary depends on his not understanding it.
Quick question if you are willing to answer, not holding you to it at all. 50 year retirement period, Preservation of Capital, 80% global equities, 20% global bonds. Do you reckon 2.3% WR factoring in all costs is likely to be low enough based on historical data given current CAPE ratio. Immediate reaction is yes based on my research but love a view.
Thanks. Great quote!
2.3% WR seems pretty safe. But you can check and plug in your numbers in the Google Sheet and do your own research.
thank you, appreciate the response
Hey BE, always appreciate the entertaining analyses that you provide! I’m 36 years old and looking to pull the plug in the next year. I have a significant number of assets invested passively with syndication groups in various real estate projects (multi-family, hotels, car washes, and storage units). I know you had mentioned that you had invested some in syndication groups as well (I believe with Reliant Group if I’m not mistaken). How do I go about factoring this in to my early retirement and SWR? About 40% of my investments are in these syndications, 20% in post-tax brokerage accounts, and 40% in tax-deferred retirement accounts. Any insight you could provide would be appreciated. Thanks!
I would model the expected cash flows from those investments as supplemental flows in the cash flow tab. Then see how much the rest of the portfolio has to work to create a safe WR.
Thank you for the response! I’ve been investing in these syndications for about 4 years now and most of them have a preferred return of around 5-10% annualized that they distribute monthly. Then, when they sell the property at the end of the hold cycle (usually 3-5 years), you get an additional return from the proceeds of the sale. I’ve had 4 properties sell since I started investing in syndications and they have all netted IRRs of 20-30%. Target returns are normally 12-18% though and market conditions were more favorable when these properties sold in 2021 and 2022.
Now that interests rates have increased and valuations have gone down, some of the GP sponsors have paused distributions as a lot of the cash flow has gone to purchasing new rate caps that banks require for the loans used to purchase the properties. This is only expected to be temporary, but it does make me wonder how I should project my personal cash flow from these investments to calculate a SWR. Do you have any additional thoughts?
I assume a modest return, i.e., ~5-8% real for those investments (even though one has so far had a 20+% IRR). Then project forward today’s value plus return every year minus an assumed flow back over the next ~10 years to me until the investment is depleted.
Example: today’s value = 500,000. Rate of return: 5%. payback over 10 years.
In Excel: =PMT(0.05,10,-500000,0,0)
Gives you: $64,752.29 annual for 10 years.
You’re absolutely right about his crazy SWR “math”.
However I think a lot of the FI community misses some psychological nuances behind his other debt avoidance strategies.
For example, most people are going to buy less stuff if they pay have cash for it rather than put it on credit cards, even if the math says you’ll come out ahead putting it on a 2% cashback credit cards and paying them off each month.
Also, you’ll get a more affordable car if you pay cash rather than taking out a 0-4% loan, even though the math says taking the low interest debt and invest comes out ahead. Likewise if you go with the 15 year mortgages that he touts over 30 year ones, you’ll consume less housing and most will reach a level of financial freedom compared to leveraging up with the 30 year loans.
Yes a lot of people in the FI community have the discipline to go with the same more sensible houses/cars no matter the borrowing terms, but most humans aren’t so rational.
Those mathematically suboptimal hacks are necessary because people are not doing a good enough job explaining the math. Case in point the debt snowball (inferior to the debt avalanche). Apparently, it’s much easier to offer snake oil cures than explaining why the mathematically sound method is better. We would all benefit if financial influencers treated everyone like adults, not little children. I am sick of financial “experts” justifying bad advice with “oh, people will feel better with the debt snowball.” There are lot’s of things that people do that feel good: smoking, drinking, drunk driving, etc. Feeling good about something doesn’t always justify it!
https://earlyretirementnow.com/2017/06/14/good-advice-vs-feel-good-advice/
No. FIGUY2 has it right. Fifty percent of people have an IQ below 100. Sixteen percent have an IQ below 85. For some people, there is no amount of “explaining the math” to bring them over to the financially optimal path. Ramsey is a great resource for people who lack the mental capacity (or financial discipline) to optimize the strategies here.
What a sad and defeatist attitude. Given your own lack of reading comprehension (see my reply to your other comment), you should be careful commenting on other people’s IQ. Just saying.
Also: I’ve seen a lot of otherwise intelligent people falling victim to the mathematically suboptimal advice.
Sad? Sure, but it’s the truth. Some people are not capable of understanding certain things. It’s reality. Ramsey has many flaws, but he also does a great service for many people.
Thanks for the unnecessary insult. My reading comprehension is fine, and what I said in my other reply is true, even if I didn’t put every detail in there. There’s no reason to get butthurt when someone has a different opinion. We’re just having a discussion. I hope someone reading through this sees this post/comments and learns from it. I was simply trying to add a different perspective that you may not have considered.
You started the insults. Not everybody is above average IQ. People below that average deserve our compassion, not your insults. People below average intelligence deserve financial experts taking the time it needs explaining what’s going on, so they don’t fall prey to this DR nonsense. I find it very, very off-putting when you talk down on people who need help the most. Hence, my comment that seems to have caused some butthurt on your side.
So, just like you, I hope that people reading through my post and the comments will learn something. They learn more from facts. They don’t learn much from your IQ stats and insults.
Re: 100% equities in retirement (https://earlyretirementnow.com/2023/11/12/dave-ramsey-8-percent-withdrawal-rate/#more-76315:~:text=Crazy%202%3A%20Dave%20Ramsey%20wants%20you%20to%20hold%20100%25%20equities%20in%20retirement.)
You also advocate for 100% equities in retirement (https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/). Obviously there are differences; you account for SORR. But, this should not be a bolded, numbered (#2‽) section.
You misunderstood that post.
A glidepath starting at well under 100% and then slowly shifting to 100% is very different from the DR approach. As I showed in that post, a GP can alleviate SoRR and do better than all the static allocations, even the best historically best static allocation.
No, I fully understand it. I said there are differences (admittedly, big differences), but the end is 100% equities in retirement. That’s the only point I was making. The issue is not that he suggests you hold 100% equities; it’s how he gets there. It just seems a little misleading.
I didn’t mislead anyone. The GP starting at 60% with the option to move to 100% later in retirement works best if we shift into equities right around the market bottom and during the subsequent recovery. 100% is OK during that time. 100% is not OK during normal times, certainly not today.
You also have the option to not shift into 100% equities if you never go through a 1929-1932 lookalike. So, my 100% equity recommendation is very different from DR’s.
Right. That’s what I said. The differences are the GP/accounting for SORR. No misunderstanding here.
So, I interpret that as you’re taking back your suggestion “But, this should not be a bolded, numbered (#2) section”
I can certainly live with that. We can shake hands and move on.
Mr Ransey should retire and stop annoying people. He has done some good in his beginning, but now he’s just an old dude spreading lots of nonsense and has a dirty mouth too
Just the other day he said that countries like China and Brazil are worthless and worth less than Texas…what kind of people say that?!
He’s stepped on so many tows by now, oh my! What an insulting and also useless thing to say.
Thank you for the insightful information on the reality of this topic. How would the safe withdrawal rates change if using a worldwide weighted market fund such as a ETF like VT? Do you recommend using a world fund and would this lower volatility and increase the safe withdrawal rate?
In the case of a US recession and bear market, all world indexes will go down.
https://i0.wp.com/earlyretirementnow.com/wp-content/uploads/2017/08/diversification-chart01.png?resize=863%2C626&ssl=1
(from: https://earlyretirementnow.com/2017/08/23/how-useful-is-international-diversification/)
That said, there have been very differential paths during the recovery that follows. Sometimes Int’l stocks significantly outperform or underperform during the subsequent bull market. So, diversification is no panacea. If you like to simulate your own scenarios, in the Google Sheet I now include an international (MSCI World ex USA) as one of the investing options.
ERN, first off thanks for a great article. This piece of Ramsey advice has been one of the biggest cautions I’ve given people about DR. Of course, you are now part of the legion of math geeks that lives in their mother’s basement (sorry for the demotion!)
However, the DR reality is worse than indicated above… Dave is not merely suggesting that the market and passive index investing would generate 12% nominal PA returns but that one can “easily” beat the market by choosing good “growth stock mutual funds” (his words) that have previously out-performed (literally advocating for ignoring the standard and legally required mutual fund disclosure on past performance vs future results).
So to recap:
1) Invest in potentially actively managed funds without regard to ER or any other active vs passive risk factor.
2) Shift everything into growth stocks without regard to risk/variance there.
3) Assume ridiculous market returns. As indicated above he uses this to suggest a dangerous withdrawal rate. He also uses this in other ways. For example, to suggest incorrect amounts for life/disability insurance and uses the 12% / 8% to suggest it is “always” better to take social security early (although I did see a recent article suggesting to take it late so maybe there’s a mini revolution on going at Ramsey solutions?)… when I’ve seen videos of him on this subject he suggests early is optimal.
Dave is best at being a marketer. Even with the above discrepancies I have to admit there is no one better at convincing someone to shed excess debt and treat money seriously but… once you graduate beyond that relatively low threshold he has little to offer.
Yes, good points. Of course, he will claim that those actively-managed funds will beat the market, but most of the time, the expected return should be modeled as market expected return (times beta, if applicable) minus expense ratio. Very likely, DR’s recommended funds will underperform and diminish the chances of the 8% Rule succeeding even more.
Ironically, The Money Guy Show did a bit on the 8% WR as well recently (I’d think they were copying your idea but they still reference Trinity study for WR rates) … they have a simulation they present there showing a lower overall return for a hypothetical “Ramsey portfolio” vs even the S&P:
https://youtu.be/Rc1nJj4vE_w?si=hdlODk6Iy_2VDCGm
Fantastic post, yea I take some things that Dave says with a grain of salt. Like ‘never borrow money to buy cash flowing real estate’. I think he forgets that he’s a multi-millionaire and likely has a couple Million stashed over in a corner for a rainy day real estate deal. Most of us mortals have to borrow and figure out how to get an ROI on borrowed cash. Anyway, great research as always!