- Dave Ramsey recently said that the 4% safe
withdrawal rate is stupid, and that you can safely withdraw 8% of your portfolio
every year in retirement without running out of money. - A million dollars should create for you an $80,000 income, boys
and girls, perpetually. Like, if forever... You should be able to pull 80,000 forever and never destroy it. - Let me show you why he's kind of right, but also mostly wrong at the same time, which is going to leave a
bunch of people flat broke. Here's his claim, if your portfolio returns 12%
annually and inflation is 4%, then you can safely withdraw 8%. Leave that 4% in the investment
account for it to grow, then rinse and repeat
this process every year, and you'll never run out of money. His reasoning for why this works is because the math that
he gives, is the math. - Listen, man, the math I
just gave you is the math. - And I actually agree with him. In a vacuum, his math is correct. But the real world is not a spreadsheet, and his math ain't math. I'll show you the probability of success with Dave's plan in just a minute, but let's start by breaking down why this is terrible advice to follow. The first problem with his claim
is that you should continue to assume a 12% average
annual return going forward because that's what
he's gotten in the past. I'm not saying he's
lying about this return. He probably has gotten
that up until this point. Heck, here are the average rolling returns of the S&P 500 over a
different 5, 10, 15, 20, and 30-year time periods. We can easily see that
there's different time periods where it's around 12% and
sometimes even above that. But anyone who even knows a
little bit about investing knows that you shouldn't
use past performance as an indicator of how things are going to play out in the future. And assuming something as high as 12%, is absolutely bananas. This is like a super optimistic shoot for the stars expectation. Realistically, you'd wanna
have multiple ranges. So, for example, maybe
your average expectation is a 7% average annual return, a 9% optimistic return, and a 5% pessimistic return. Run the numbers, then make
sure that you can handle all three of those outcomes. Obviously, you hope that you
hit that optimistic number, but you are not banking
your financial future on it. The second problem is with this
safe withdrawal rate of 8%, it's basically how much
you can safely withdraw from your portfolio every year to last you a certain amount of time. I'm not gonna dig into
all the research here. You can look it up if you want, but the general thought process is that you can safely withdraw 3 to 4% in the first year of retirement, then adjust up for inflation
every year after for 30 years without depleting the principal balance. These numbers were determined
by using a bunch of past data as opposed to Dave's vacuum calculation. You know what? His new nickname should be, Dyson Dave. Keep in mind that the 3
to 4% is just a guideline. It could potentially be scaled
up or down a little bit, depending on a bunch of different factors that we're not going
to cover in this video. As you can imagine, if 4%
will get you through 30 years, then surely, withdrawing 8%
per year is going to deplete that principal balance
in less than 30 years. I'm dog sitting right now and I'm getting bothered. (laughs) Hi, sweetheart. Well, let's see how quickly
you're gonna be poor by taking Dyson Dave's advice using the retirement planning software that I use called, NewRetirement. I put $1 million into a Roth 401K with a 12% average annual return for this hypothetical person. You're going to get the
same type of results if we use a taxable account, but I'm trying to avoid confusing everyone by adding taxes in here. I also assumed no money
for Social Security because Dave didn't assume that either. Plus, once again, it would
just cause more confusion for this quick example. Then we've gotten 8% withdrawal strategy starting at the beginning of 2024, because that's when this
person is going to retire, and I'm also assuming
Dave's 4% yearly inflation. NewRetirement did a thousand
Monte Carlo simulations to account for normal ups
and downs in the stock market to come up with this probability. The probability of success with this withdrawal strategy is 40%, give or take a few percentage points. It's like saying, "Hey,
if you hop on that plane from Charlotte to San Francisco, then (chuckles) there's a 60% chance that the plane is gonna crash. Do you still want to fly?" According to Dave Ramsey's plan, if you retire at the beginning of 2024, then there's a 90% chance
that you'll have $0 by 2033, nine years later. But let's imagine there's this person in an alternate universe
named, Rave Damsey. He assumes the same outrageous 12% average annual return as Dave Ramsey. But Rave decides to reduce
his safe withdrawal rate down from 8, to 4%. If he did that, then the
probability of success goes from 40% to 81%. If only Dave Ramsey was
willing to change his mind about anything. Unfortunately, he is a
victim of his own success, so I can see him actually
doubling down on this. The main issue is that Dave assumes you're going to get 12% every single year for the rest of your life. But that's not how averages work. Here are the yearly
returns of the S&P 500. Some years it's above his
crazy 12% return assumption, and other times it's below. This is what's called
Sequence of Return Risk. It refers to the risk that the order in which
investment returns occur can negatively impact the
overall value of a portfolio when withdrawals are made. This is especially problematic if these withdrawals happen
during periods of low or negative returns. This risk can lead to using up
all of your retirement funds faster than expected. Sequence of return risk
is what Dave Ramsey refuses to account for in
his 8% withdrawal rate. They are accounted for in
the 4% withdrawal rate, which is why the 4%
withdrawal rate is what it is. Here's another good example
of sequence of return risk from Charles Schwab, and why the timing of when you retire is extremely important. Two investors retire
with a million dollars. The first retires and experiences two consecutive years of market declines and ends up with $0 in less than 18 years. The second investor didn't
get those two declines until a few years later, and she's left with about $400,000. Here's why I say the 3 to
4% safe withdrawal rate is just a guideline. If both of these retired investors scale back their withdrawal
amounts and spending, then their portfolios
will in fact recover. Your withdrawal rate is not static, and it should be adjusted
based on market conditions, which is why you need to be
able to flex your spending up and down, depending on
what's happening in the world. Seems to me like Dave
Ramsey is the fire starter and the firefighter. Sure, he helps you get out of debt. Then he sends you back to the poor house with his investing advice
so that he can turn around and help you get back out of debt, because you need to borrow money again since your investments are worth $0 now. As with all of these projections we make, when it comes to saving for
retirement, they are models. And sometimes models change. It's no different whether you are pre or post-retirement. Life isn't static. It's constantly changing
in different directions, up and down. You're going to need to monitor and adjust leading up to and after retirement. The way I personally plan, monitor, and adjust my retirement outlook is through retirement planning software called NewRetirement. It is a must-have for
do-it-yourself investors. They do offer a free
version, but to be honest, the price of the paid
version is insanely low for all of the amazing
features that they give you. I'll have a link in the description of this video to check it out. Heads up that if you get the
paid version through that link, then it does help support the
free content on this channel as well as my dog, Molly,
at no extra cost to you. So thank you so much in advance. YouTube thinks that you
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that thumbs up button to help support the channel. I'll see you in the next one, friends. Done.
