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.

Spreadsheet seems the safe way to go. I look at how much I’ll have at retirement, how much return I’ll make on that money a year minus what I’ll spend a year and then back calculate how much I can spend a year ending with zero when I die. Using 5% growth and dying at 85, this results spending about 7% of savings first year but that increases every year after. As far as living longer or wife living longer and leaving something for my one child, I figure my spending won’t actually increase all the way to my death so there would be substantially more money left towards the end.

The problem is you cant foresee the growth youll actually get, nor can you forsee how long youll live.

Heres 7% withdrawl rate:

http://forums.pelicanparts.com/uploa...1700889976.jpg

Rich, broke or dead says 19% chance youll die with money left.

This is my "go to" free tool. https://www.portfoliovisualizer.com/backtest-portfolio

I spend time tinkering with variables in this tool but typically find that I can safely survive on a 6% withdrawal rate (.5% per month). If you have a portfolio with a lot of positions this could be time consuming to enter them. I normally tinker with a few funds and ETF's.

One off purchases can really throw a kink into our plans. When I spend any amount outside of the plan it is with the knowledge that those dollars will not be replaced. ie my recent motorcycle purchase.

http://forums.pelicanparts.com/uploa...1700949172.jpg

If market performs significantly below average,
net assets will continue to outpace spending
And my kids will have a nice early retirement.
Hopefully not TOO early.

“End of Plan”

Estimated year we are both dead, 2054.
just a guess.
Pretty sure she'll outlive me by quite a ways.

You’re no fun!

I played around with that site and it’s interesting. My plan is still to spend more than 4%, probably less than 7% since that would be quite a bit more than I spend now. Whatever I decide to spend, I’ll adjust as time goes on and I see how my finances are doing but I certainly don’t want to be sitting around at 80 wishing I’d done something earlier while my body and brain were still functioning pretty good.

That engaging data analysis doesn't allow enough variability in the model to work for me. The wife will likely take SS security earlier than me - even though we are the same age. I've got an excel model that I built that takes into account the various SS numbers as well as an expected budget - with a few years of additional costs for insurance before we are Medicare eligible. I can vary the market return numbers and inflation rate to see what occurs with our 401k balances.

Can you live off of $50,000/year?

So far so good, I retired at the end of May. Everything is paid for, no dependents and because my house is so tiny, all the bills are much cheaper- think utilities, taxes, insurance and repairs.

So, the percentage has me questioning. I get the percentage year one, but then that same percentage will likely net you less dollars each year.

Isn't the idea to spend it down to zero, or whatever you leave for legacy. But if you are down to your last dime, your no longer pulling 4% your pulling 100%

I really like the graph because its got a standard mortality built into the graph. Helps you visualize that 'ol 'end of plan'.

Right, we all makes our bets and we takes our chances.

The really important thing for successful 'retirement' is that you spend less when the market is down.

The very worst case is you retire and then are immediately exposed to a long steady decline - for example if inflation was high and market stayed the same. In that case every penny you spend is 'expensive' in the long term because those dollars spent aren't coming back to appreciate for the next 20 years.

The above graph is probability of an outcome. That means there is actual historical precedent to go broke at 7% withdrawal rate. In fact the probability of failure with 7% withdrawal is 0.19, so almost 20%. If you actually do spend 7% (or even 5%) in the face of a long recession then you really, actually aren't going to make it. Outcome depends on what actually happens in the future. You can be optimistic and bet on it, up to you.

Right! Like xeno's paradox? Everything gets discrete once you can't actually live on the 4%. Suppose market drops 50% and stays down for 5 years. The 4% withdrawal rate on half'd money is effectively 8% as far as damage done to future returns. Even when market recovers those big bites have done serious damage to the portfolio. Damaged portfolio is going to produce withdrawals that are too low and you can't reasonably live on the 4% - even though you're getting that cat food on sale.

Kinda dumb. You can live off 1% if you have a big enough portfolio. Funny how no one is willing to DELIVER 8%.

8% and more as long as you ask for it early:

https://en.m.wikipedia.org/wiki/Madoff_investment_scandal

https://www.economist.com/finance-and-economics/1999/07/15/money-for-nothing