David breaks down a recent Dave Ramsey interview where he advised a 50-year-old widow on the best way to save, invest, and withdraw her retirement savings.
According to Ramsey, if the lady invests $1000 every month for 15 years, she will have accumulated $500,000, which gives her permission to withdraw 10% of her savings every year for the rest of her life.
The problem with this recommendation is that she will likely earn 9% returns per year, not 12%.
She is also more likely to run out of money before running out of life if she withdraws 10% of her savings every year.
The gaping hole in Dave Ramsey’s investment approach is that he seems to have a limited understanding of the sequence of return risk. This is the order in which you experience investment returns in retirement.
Generally, it’s safe to show future returns based on a historical track record consistent with your future investment horizon.
For example, if you want to know what rates of return you’ll likely experience in the next 15 years in the S&P 500, you need to look at how the index performed in the past 15 years.
According to David, Ramsey’s overly inflated retirement variables are setting his listeners up for failure. By inflating his assumptions, Dave Ramsey gives his listeners an overly optimistic view of how much money they must save to reach their retirement goals.
But why does Dave Ramsey have such a flawed view of retirement planning?
David believes it comes down to two things:
- Dave Ramsey likes to portray himself as the retirement planning outsider who is at war with the mainstream financial planning community.
- He believes that if he can show his followers lucrative investment projections, more of them will sign up for his financial independence programs.
Don’t be seduced by Ramsey’s inflated rates of return or his massive withdrawal rate assumptions. You’re much better off using a 9% rate of return and a 4% sustainable distribution in retirement.
Mentioned in this episode:
David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
PowerOfZero.com (free 3-part video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com