Exposed: The Shocking Reality of Dave Ramsey's 8% Withdrawal Rate

once you reached early retirement, you can withdraw 4% of your savings each year, adjusting for inflation in future years if necessary. That's absolutely wrong. I'm going to have to find out where that video is and get it taken down. Hope we didn't put out trash like that. Was it four to 5%? Like, no, it shouldn't have be 4 to 5%, it ought to be more than that. I'm perfectly comfortable drawing eight. Sure not five or three.

Dave Ramsey, I think he is off his rocker. The probability of success at about 90%, that's says that you can withdraw something around 4.6%, not 8%. Here's the problem, Dave: you're influencing people, and that changes the amount that they're saving. I think they'd be a lot better off to oversave than undersave. Once we get to retirement, Dave, it's too late to fix it. This doesn't make [Music] sense [Music]

Hey, welcome back to another edition of We're Talking Money. We're going to be talking about a controversial subject: Dave Ramsey. He's an influential personality, he has a great YouTube following, great podcast, and for the most part I think is conservative views, they've always made reasonable sense. But lately it seems like he's getting more and more aggressive, and that conservative approach has gone out the window.

What was it, a month ago? George Kamel released a video that said that the withdrawal rate for a 30-year time horizon should be closer to 3%.

Another flaw with FIRE is that they say you can withdraw 4% of your nest egg, but you'll really need to withdraw closer to 3% if you retire that early. So look at this: if you've saved $1.5 Million by your 30s, that amounts to living off $45,000 a year. We're talking about living for 55 years off one account and not depleting it, and if you withdraw 4%, there's a higher chance that money's going to run out well before that time is up.

Okay, I'm a little confused, because I don't know what the hell George is doing doing a 3% withdrawal rate, because that's absolutely wrong. I'm going to have to find out where that video is and get it taken down, because that's just wrong. You don't need to have a 3% withdrawal right. That's ridiculous.

This is just honest math. Literally, there's a site called honestmath.com, and they ran 10,000 different financial simulations to get this chart and show you these numbers. All right, so let's look at this chart. On the left side we see years in retirement, on the top we see the withdrawal rate, and as you can see, if you have a 30-year retirement with a 4% withdrawal rate, you're going to have 3% of that account balance remaining 30 years later.

I hope you misunderstood. I hope we didn't put out trash like that. Was that four to 5%? Like, no, it shouldn't have be 4 to 5%, it ought to be more than that. I'm perfectly comfortable drawing eight, but if you want to be a little bit conservative, seven, but sure not five or three.

It's all about this withdrawal rate of 8%, so says Dave Ramsey. Dave Ramsey is not, in my opinion, just a hack. He's considered an expert, he's been doing this for a long time, but I believe he's missing something here. He doesn't have credentials like a Certified Financial Pharisee, as he calls it. Want him to be a certified financial planner, not a Certified Financial Pharisee.

One of the immediate problems: he doesn't talk about the volatility of the market. What he does talk about is his portfolio, the way he invests, and he has 25% across four classes. So he has large cap, aggressive, I think growth and income, and then in some international. That might work great for Dave, but here's what he leaves out: drawdown in the market, volatility.

So if you can live off of 8% and you're invested in good mutual funds, you probably pretty much do it in perpetuation. It might dip into it a little and it might refill in another year. Yeah, but overall it'll pretty much run like a machine the rest of your life.

There is no index that goes up in a straight line. Now, it might seem like it in recent years, because our Federal Reserve been pumping money into our economy, and so it's been going up pretty rapidly. It still doesn't go up straight line. If you're taking 8% and the market dumps by 10 or 15 or 20%, how likely is it that you will recover? Dave says if you're going to get 12%, as though it's something easy to do from the S&P 500, he says you can take eight, leave in four.

Your money's growing and you get to spend eight. You think you can only pull off 4% off of investments making 12? Where the flip is the other 8% going? Well, 4% of it went to inflation, that's where it went. The other 4% is just sitting there, so you are growing your investments instead of living off of them. I'm not destroying the nest egg, I'm not even touching the nest egg, I'm growing the nest egg.

I think he is off his rocker. This doesn't make sense. The next thing that Ramsey seems to forget is none of us control how long we will live in retirement. Might be in retirement for 10 years, 5 years, 25, 30. A lot of this depends on, one, if you have longevity in your bloodline, and two, when do you retire? What if you retire early? You could live in retirement for 30, 35 years. An 8% distribution rate could be deleterious to your portfolio, and I'm going to show you why.

Let's say, for example, that you are going to have 30 years in retirement. Fidelity did some very deep research, and what we find is the probability of success at about 90%, that says that you can withdraw something around 4.6%, not 8%. Let's give Dave the benefit of the doubt. Maybe you don't retire until, say, 70. Your retirement is going to be about 25 years. Even so, about 5% was the most we could withdraw and still reach that 90% probability of success.

I want to look at two more points. The first: inflation. That's sort of the silent thief. It's happening whether the market goes up or down. So let's say that you build your retirement lifestyle on an 8% distribution rate. You're thinking, wow, I get to live a lot better with 8%. What happens if your cost of living goes up, simply because the cost of living is going up in general? What if your distribution rate has to be 9%, 10%? Be careful. Inflation is one that you have to think about.

So one of the final points that Dave should have mentioned, any he just doesn't, it's assuming that people will stay 100% invested in stock.

I've actually freaking got investments. My money is actually invested exactly the way I teach people to invest it, and I'm easily making 12% of my money, easily, average throughout a decade. So it's just asinine that we do this stuff.

We diversify for a reason. We diversify to mitigate risk and to improve our opportunity for better returns. If you have plenty of other resources, May something like Dave, who was an incredible marketing machine, it might work for him, but most people will not stay invested 100% of the time, 100% in equities. That would be a very high-risk move that probably wouldn't pay off.

I'm not saying that you shouldn't be 100% equities, maybe in your accumulation phase, but when you get to retirement, you need to be sure that money doesn't run out, and you don't want to risk having all of your eggs in all equity baskets when the drawdown effect of that can be quite large.

Well, I was trying to back check it, because three to five, I thought that was a big range, and a lot of the studies I found showed... There's a lot of studies that are stupid in this space. It's just wrong. Listen, man, the math I just gave you is the math.

Here's the problem, Dave: you're influencing people. They've been planning for a 4% or 5% distribution rate, and now they're 10 or 15 or 20 years from retirement, and they're all of a sudden thinking, Dave Ramsey said I can take 8% as my distribution rate, and that changes the amount that they're saving. I think they'd be a lot better off, Dave, to oversave than undersave. Once we get to retirement, Dave, it's too late to fix it. And most people are not marketing machines like you are, with millions of dollars of subscriptions coming in. The fact of the matter is, Dave, it probably doesn't matter what your performance is, but for most people it does.

Dave's back-of-the-napkin math might be good for some things, but when it comes to your retirement, you need facts and figures, you need the data, and you need to build a plan based on your set of circumstances, not some boilerplate idea that Dave Ramsey thinks makes sense. 93% of all the mutual funds out there never beat the S&P 500, yet Dave Ramsey makes the assertion that it's so easy. Where is he coming from with this information?

What do you think? Do you think an 8% withdrawal rate makes sense? I'd love to hear from you. Drop something in the comments, tell me what you're thinking. Maybe you can help us better understand why Dave Ramsey's right, even though we're pretty confident that he's not.

Stay away from 4% withdrawal rate morons who are telling you this is the thing. So, God, it's just aggravating.

Thanks for watching. I hope you'll subscribe to our channel now. I hope this show has inspired you to do your own homework. We're putting out videos like this every week to help you make better financial decisions. Subscribe, ring the bell so you never miss a great episode, and I'll see you next time when We're Talking Money.