Dave Ramsey’s 8% retirement rule pushed back – critics say he’s ‘profoundly wrong’

Financial Guru Dave Ramsey continues to stir controversy, claiming many believe only the rich are equipped for this. This time it’s his 8% retirement rule. In an episode of “The Ramsey Show,” Ramsey calls out the “silly” advice that financial experts advise people to withdraw just 4 to 5 percent of their investment portfolios.

Ramsey firmly believes that retirees can safely withdraw 8% of the starting value of their portfolio each year, adjusted for inflation, without depleting their capital. However, many critics almost unanimously agree that this advice is unrealistic and potentially dangerous.

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The main criticism is based on the assumption that retirees enjoy a constant annual return on investment of 12% and that the average annual inflation rate remains at 4%.

While the average inflation rate over the past decade has remained slightly below 3%, recent years have seen higher inflation trends (7% in 2021, 6.5% in 2022 and 3 .4% in 2023) due to global events. It may therefore be risky to expect inflation rates to remain at 4% given the unpredictability of the current global economic climate.

Many also argue that Ramsey’s approach is “out of touch with reality”, noting that an 8% withdrawal rate is unsustainable for most retirees due to stock market volatility and historically average returns. weaker. The average rate of return for the S&P 500 is approximately 10.5%. (or 6.6% when adjusted for inflation), it seems unlikely that it will be possible to achieve a consistent 12% return.

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The Ramsey Rule also assumes that retirees have accumulated a substantial nest egg, which is not the case for the average American.

According to Vanguard, the average retirement savings Americans currently have are:

  • 25-34 years old: $30,017

  • 35-44 years old: $76,354

  • 45-54 years old: $142,069

  • 55-64 years: $207,874

  • 65 years and over: $232,710

Under the Ramsey Rule, a retiree with $232,710 would withdraw $18,617 in their first year of retirement. Coupled with the average monthly Social Security benefit of $1,776.73 in April 2024, this amount may be insufficient to cover living expenses for many retirees.

Financial experts fear this advice could force retirees to outlive their savings. Relying on an 8% withdrawal rate could lead to significant financial hardship if investments underperform or there are extended periods of inflation during retirement. Additionally, investing 100% in stocks exposes retirees to significant market risk, especially during economic downturns.

That’s not to say it’s impossible to follow Ramsey’s advice. For those with a significant investment portfolio, especially in the decades leading up to retirement, these tips can significantly improve their financial future.

However, most financial experts are more cautious and less idealistic about their clients than Ramsey…

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