I decided to do something different for this week’s podcast episode. I added my own commentary to a Dave Ramsey video he put out in November 2023.
The video features a young man who called into Dave’s show, seeking advice on whether he should stop making extra payments on his mortgage to invest more money now. His hopes are to have a bigger nest egg for retirement, anticipating low withdrawal rates.
I personally have never listened to Dave Ramsey or read any of his books, but it is my understanding that he’s good at helping people get out of bad consumer debt. However, in this episode, his advice is not just a little wrong; it’s very wrong. Following it could be financially disastrous based on the simplicity of his recommendations.
The Problem with Average Returns vs. Actual Returns
Dave’s argument assumes you’re getting a 12% return every year without any losses. That’s not how it works. This is the difference between average returns and actual returns.
In retirement, I care about actual returns and the order in which you get those returns, not averages. This is the biggest difference in how your money grows during your working years versus how it is decumulated in retirement. That’s what really matters.
Faulty Information About the S&P 500
Dave said the S&P 500 was up 10% in 2023, which it was, and ended up even higher at year’s end. However, he omitted that the S&P lost 18% in the previous year.
The Reality of Withdrawal Rates
Dave criticizes “nerds” in Reddit threads who calculate withdrawal rates. However, experts like Dr. Wade Pfau recommend a 3% withdrawal rate, not 8% as Dave suggests. Even Fisher Investments advises clients not to withdraw more than 5%.
Breaking Down Wall Street Math
Dave said he gets 12% on average over a decade.
This is the difference between average and actual returns. Your statement might show a 25% average return, but your actual return could be zero. And don’t forget, you pay management fees on that portfolio, so your actual return is even lower.
Example: Average vs. Actual Returns
| Year | Return | $100,000 Portfolio Value |
| 1 | +100% | $200,000 |
| 2 | -50% | $100,000 |
| 3 | +100% | $200,000 |
| 4 | -50% | $100,000 |
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- Average Return: 25%
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- Actual Return: 0%
The Importance of Understanding Sequence of Returns
Dave’s statement that the S&P was up 10% at the time of his recording is accurate but also misleading. At the end of 2023, the S&P closed with a 26% gain, but it lost 18% the year before.
If you withdrew $80,000 and lost 18%, then withdrew another $80,000 the following year, your portfolio would be just over $820,000. Your portfolio would be missing approximately $180,000 after two years, not up like his simplistic calculation would lead you to believe. It’s not the end of the world…yet. But that’s why the sequence of returns and a moderate withdrawal rate matters.
The Flaws in Dave Ramsey’s Withdrawal Rate Advice
Dave said you can take a 4% inflation increase, which is very high. Most people barely have enough to take a 2% inflation increase every year. If you took a level 8% withdrawal rate, without increases, and had a positive sequence of returns, like in 1995, you might have more money than you started with after 30 years. But if you took 4% increases, you’d be out of money in 22 years. Even with a best-case market scenario.
Dave’s 12% average return advice makes it sound like people will get 12% every year. But that’s not how it works. He told a caller to keep making extra mortgage payments to invest more money later, which violates the principle of compounding interest. I give a very interesting example in the podcast.
Exploring Income Annuities for Retirement
The only way to get an 8% withdrawal rate forever is with an income annuity. Right now, a 65-year-old couple can get a guaranteed 7.9% payout rate, no matter how long they live. Even if the annuity runs out of money, it will never run out of income.
In retirement, cash flow is what matters, not how much money you have in your pile. Now, you cannot put all your money into an annuity, so you’ll always have some for other investments and an emergency fund.
The key, however, is the sooner you plan for retirement, the higher the payout rate.
I hope you enjoy the format of this week’s podcast episode and find it helpful. If you do, please share it with someone else who might benefit from it.
And of course, if you’d like to see what kind of rates and income are available for your specific situation, simply click on the Schedule a Call button and reserve a time on my calendar.
All the best,
Marty Becker
Podcast Episode 37: Debunking Dave Ramsey Annuity & Withdrawal Rate Advice
Download The Episode: Debunking Dave Ramsey Annuity & Withdrawal Rate Advice on Apple Podcast