Dave Ramsey and the 4% Rule
 

Anyone else caught this tempest in a teapot? I follow a few financial influencers on YouTube and recently everyone in that space has been discussing the 4% Rule: the idea that you need a retirement portfolio large enough that you live off just 4% of it a year.

Why? Dave Ramsey says you can actually take 8% and be fine. One of the influencers on YouTube is part of Ramsey’s own company, and someone cited the rule to Ramsey on his show and he lambasted the influencer on the air, saying he would pull the video.

Eight percent is just nuts.

What has been your average return over the past 10 years? How much do you want to leave your kids?
I have been told as low as 3%.
I have pondered this many times, it will be interesting to hear what the brain trust here says.

The answer is 'it depends'.

There are so many variables that there's no simple answer. Where is your money? Real estate, money market, maybe a business? When will you divest? How old are you, what's your life expectancy? What's your plan for your last five years? Live in your current home, downsize, assisted living? Do you want to drain your savings, or leave something for your surviving family? When do you want to disperse your 'excess' funds? And on and on...

Anyone that throws X% numbers around as a 'rule' is just talking. Talk is cheap.

Build a spreadsheet. Work YOUR numbers.

I try to hang around 4 including management fees. Lifespan is increasing. I don't doubt that over the past 10 years 8% might have been ok, but I think those were pretty good years for most portfolios.

Some Ramsey apologists have said he’s being realistic. Conventional wisdom says to plan for 30 years, the reality is most retiring at 65 won’t see 80.

I retired at 48, with the strategy of a 5-year buffer of living expenses invested in a HYSA, and the rest in what I’ve always invested in, the S&P 20 (just the top 20 stocks by market cap in the 500). It’s where most of the gains are anyway, so it doubles every 4 years or so.

Problem I think, if someone is listening to Ramsey they almost certainly won’t be able to figure the math. Intersection of risk and return - it’s fairly complex.

There’s a set of people that accept optimistic estimates and will be badly burned by his advice. 8%? Really? That rate will chew through your nest egg pretty quickly if there’s a downturn.

Never been a fan of Ramsey….8% is a good way to go broke fast for most people - it’s insane. It’s a VERY individualized thing IMO, there are just so many variables related to ones portfolio size, spending habits, fixed costs, age, health, WHAT you are invested in, and on and on….I have never found these generalized rules to be helpful when it comes to financial planning.

Lazy/dumb/uneducated/etc., you end up with more poor decisions. Use a one-size-fits all retirement plan at your own risk.

I run into a lot of final expense life insurance folks who sometimes parrot Dave Ramsey's advice. I don't have the heart to tell them that they're in the situation they're in precisely because they just started listening to sound financial advice after they quit working and got on SS and Medicare with not a dime of savings.

I retired in May of 2014.

I decided to record my financial assets (excluding real estate, cars, etc.) every end of month to see what direction I was headed.

Almost 10 years later (now) my assets are higher than when I retired. I was worried about it for no reason.

five or even six percent might be doable,
If the % would stay there.
Problem is that runaway inflation will make that
percentage go higher every year.
if we could get the government to stop manufacturing
inflation by printing money like it's going out of style.

I remember not that long ago, some people on this board were
all excited about getting their FREE government covid checks.

I wonder if the fools realize how much that free money
has and will cost them?

Probably not, too complex an idea for them to grasp.

Exactly. The only way to plan your spend down is to get out a spreadsheet fill in all the numbers from your list, and do the arithmetic. If you don’t feel confident about it you can hire a fee only financial planner to help. It’s money well spent.

I thought everyone put that into the stock market using Robinhood?

Sorry. I didn’t read all the above posts. DR is talking to people who aren’t particularly sophisticated. I ignore him.

But, my calcs are for 5%. Why? Because I have historically seen returns well above that.

My thought is if you aim low, you have some cushion if things get wonky.

The 4% rule was developed by some guy named William Bengen in the 90s and it's a very basic, very conservative base rate of withdrawal.

Your personal circumstances will dictate a safe withdrawal rate, and your choice whether you want to die with nothing or die with something.

Right now you can get 5% in the money market, so I would say that is a pretty safe way to withdraw without touching the principal…

Had read the originator of the 4% rule was revisiting the rule.

https://finance.yahoo.com/news/even-inventor-bill-bengen-revisiting-143000007.html

In 1994, rookie financial adviser Bill Bengen was looking for a rule of thumb to give his clients on how much they could safely withdraw from their assets each year. He found that 4% — adjusted based on inflation — was the magic number.

- I haven't pasted the entire article -

Even Bengen himself has been compelled to revisit and update the rule a few times over the course of the last three decades. That’s because his original research only included two asset classes: Treasury bonds and large-cap stocks. Now, with a third class, small-cap stocks, he believes that 4.7% would be a safe withdrawal.

In an appearance on the Bogleheads Live podcast in December, Bengen says he’s adjusted his own withdrawal strategy rate to 4.7%. But he went on to say that with sky-high inflation factored in, an even more conservative approach might be safer.

“My 4% rule was actually based upon a worst-case situation. An investor who retired in October of 1968 who ran into just a terrible, perfect storm of bad stock market results and very high inflation, which forces withdrawals up every year,” he explained.

“Are we in a similar period beginning with this year with very high inflation and potentially low stock market returns? Entering something even worse? I don't know, unfortunately. And we won't know for quite a few years.”

Until then, Bengen believes the situation is serious enough to warrant a more conservative approach for now. “Perhaps investors might consider taking 4.5% at this time when retiring until the smoke clears and we get a sense of where inflation is going,” Bengen said. “Inflation is the big wild card in this environment.”

Most financial advisors I've talked to default to assuming the retiree is trying to leave their principal to their kids. I don't have a pension so no, I won't intentionally plan to leave my kids any of my cash assets. Getting the house and perhaps my small apartment building will be plenty.

One of the tools I play around with allows you to input all of your assets, set expected returns and build a retirement budget. There is a fee but I've found it helpful.

www.maxifiplanner.com

Remember, he said put it all in the S&P 500 and average 10% per year so you can take 8% and never run out. It comes down to sequence of returns. It you retired in 2000 the S&P 500 would have dropped 10%, then 13% and then 23%. Over that time, you pulled 24%. In that case Ramsey's 8% rule blows up in your face and you run out of money.

Others retired back in 2000 and said they could get 5% a year in a CD so they would live off that 5%. Then CDs dropped to .5% and stayed low for decades. Those people also ran out of money.

IMO, the key is to invest in a mix of dividend paying stocks, high yield bonds and REITs. A mix of those would have yielded a good 5% over pretty much any timeframe. The key is to take slightly less than your dividend payout, say 4.5%. Then keep reinvesting that .05% back into buying more shares which allows you to give yourself raises over time and keep up with inflation.

I have been building portfolios like this for 30 years. It has never let me down and is the same plan I will use when I retire. The key is to rely on the income and not rely on price appreciation. That keeps you out of trouble when markets sell off.

I’m using the -8% rule.

Somedamnhow, I’m getting rich.

At some point, the RMD will kick in and I can bump up to the -10% rule.

I can’t win, I tell ya.