In this episode, David wants to share the truth about Dave Ramsey, look at the two pillars of his financial worldview, and deconstruct those beliefs.
David believes that if Dave Ramsey’s audience followed his advice on paying off high-interest credit card debt, the U.S. would be a much healthier place from a financial perspective.
In David’s assessment, Ramsey’s audience is made of lower to middle-income America, people who are making $50,000 per year but who are spending $60,000. With his approach, Ramsey seems to be dispensing one-size-fits-all financial planning advice in an attempt to appeal to the masses.
David notes that Ramsey’s audience isn’t the Power of Zero audience. Power of Zero audience members have generally done a good job of saving money, and they are in tax-deferred buckets. They’re trying to figure out how to distribute their retirement savings in the most tax-efficient way possible. It’s the person who’s making $50,000 per year, but spending 60,000 it’s lower to middle income America, who are struggling to pay their bills, so he’s dispensing one size fits all financial planning advice in an attempt to appeal to the masses.
The first Dave Ramsey principle that runs afoul of Power of Zero thinking has to do with his recommendations of going back into the tax-deferred bucket with all of the unintended consequences that go along with it. What Power of Zero thinking suggests in these cases is for you to make contributions to the LIRP in an effort to enjoy the benefits of getting to the 0% tax bracket in retirement.
For David, Dave Ramsey doesn’t seem to understand or appreciate the role that a properly structured LIRP can play in helping you get into the zero percent tax bracket and retirement, particularly in a rising tax rate environment.
David believes that financial gurus like Dave Ramsey often find themselves on the outside of the tax-free paradigm looking in trying to interpret what they’re seeing through the lens of their tax deferral worldview. While their intentions are often knowable, he says, their recommendations – if accepted at face value – can lead to a cascade of financial consequences, many of which could actually prevent you from ever getting to the 0% tax bracket in retirement.
The second pillar of Ramsey’s David has an issue with his lack of understanding of how the fees and the LIRP are structured. David sees Ramsey as someone who fixates on what the LIRP fees are in the first few years and extrapolates those fees out over the life of the program. The problem is that by fixating on the fees of the LIRP in the first few years without considering the broader picture, Ramsey perpetuates the myth that all LIRPs are too expensive.
David explains how LIRPs work. Their fees are higher in the early years and much lower in the later years. However, when you average it out over the life of the program, it’s going to cost you between 1-1.5% of your bucket per year.
The longer you keep your LIRP, the lower the average annual expenses over time.
For David, Dave Ramsey is so fixated on the fees of the LIRP in the first few years that he fails to see the forest for the trees. He fails to recognize that the longer you hold your LIRP, the greater the internal rate of return.
A situation David has seen happening is when some people get to the point in their policy when the fees start falling through the floor and, after reading a book or listening to a podcast episode by Dave Ramsey, they drop their policy because of what they have heard him say.
Just when the LIRP was starting to build a head of steam, they succumb to Ramsey’s mischaracterization of LIRP fees – which leads to them dropping their policy, losing their death benefits, and incurring unwanted surrender fees along the way.
David recommends having the following retirement planning approach in a rising tax rate environment. You want to have between four and six different streams of tax-free income, none of which show up on the IRS’s radar, but all of which contribute to you being in the 0% tax bracket.
Mentioned in this episode:
David’s books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram