Withdrawing $80k on $1 Million Forever
Dave Ramsey made a bold claim recently on his show, stating that you should use an 8% withdraw rate on your money & $1,000,000 should create for you an $80,000 income “perpetually… like forever”.
This comment by Dave Ramsey put the finance world into a storm. For the longest time, it was commonly accepted to use a 4% withdraw on your money. As inflation has increased, some have even started using a 3% withdraw on your money. Then comes along Dave Ramsey saying to use an 8% withdraw rate on your money… wild. Here is my take on this…
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First off, what do I mean by a “safe withdraw rate” (SWR)?
This basically means the rate at which you should be able to withdraw from your nest egg while still letting your money hopefully grow. Commonly, a 4% withdraw is what most professionals use. This means on a $1,000,000 portfolio, you should be able to withdraw $40,000 a year & have a 98% chance of never running out of money over a 30 year time frame (assuming you are 100% stocks).
But Dave Ramsey thinks you should use an 8% withdraw rate…
On his show, there is a caller asking about withdraw rates. Dave gives a long rant (which the full video is linked below) where he says we need to stop using a 4% withdraw rate & we need to be using an 8% withdraw rate. His reasoning?
If the market returns 12% a year, you leave in 4% for inflation & growth, that leaves you 8% left over to use. “Simple math” he said. In his opinion, he said a 4% withdraw rate takes hope from people because it makes them think they need more for retirement than they really do.
Here is the entire clip:
From the Ramsey Show (November 2, 2023):
This disturbing video rant from Dave Ramsey demonstrates an ongoing ignorance of safe withdrawal rates and sequence of returns risk, plus a combative insistence on using 12% average linear returns assumptions over decades.
Dave publicly… twitter.com/i/web/status/1…
— Marvin Bontrager, Ph.D. (@mbontrager5)
Nov 9, 2023
What do I think about this?
Real quick, I just launched a BRAND NEW podcast called The Decade Investor Podcast where I talk every week on all things money! I just released my 4th episode where I go over 11 money lies that I had to overcome to build a net worth of over $360,000 at age 25.
You can listen to it on any podcast playing app here: https://thedecadeinvestorpodcast.buzzsprout.com/share
This take from Dave is misleading people.
I have a few reasons why:
Based on Dave’s take, he is essentially saying the market will always return 12% a year. If you take 8% out, if the market is flat one year, you are taking away from your principal & not growth that year.
If you are retired, relying on a % is not a good idea. What I mean by that is this… let’s say you need $80,000 a year in retirement for expenses. If you have a $1,000,000 portfolio, based on Dave’s take, you can retire. Let’s say in year 1 the market is down 10% + you take 8% out (which is $80,000). After one year, your portfolio is only worth $820,000 ($900,000 after a 10% loss - $80,000 withdrew). When you go to take out the $80,000 for year two, rather than it being an 8% withdraw rate, it is closer to a 9.8% withdraw rate.
It is too risky. For me, if you rely on an 8% withdraw rate, you really need great timing in the market (in terms of the market on an uptrend) + no downturns within the first few years of withdraws. Needing a lot to go right, your financial plan could be too fragile. One thing goes wrong & you may be in trouble.
A twitter account I follow, Blind Luck, created a simulation to see if an 8% withdraw rate is possible. He found that over 67 time periods in the past, using a 8% withdraw rate on a $1,000,000 portfolio, you would have ran out of money 37% of the time. To me, that is waaaaaaaaay too risky for someone, especially in retirement.
Per popular request I've rerun this simulation using the Dave Ramsey version of the 8% rule.
Parameters and assumptions are listed in the graphic
— Blind Luck Project (@Blind__Luck)
Nov 11, 2023
On that note from above, an interesting take is one of the simulations had an ending balance of $22 million. So maybe the bigger takeaway is depending on how the stock market is, there is a chance your portfolio could continue to grow even taking out 8% a year 🤔
So what can we learn from this?
I think the big takeaways here are:
Dave is great for a lot of things, but his investing expertise lacks. Assuming the market will always grow at 12% is misleading people. Be careful listening to him, especially if he never shares his mutual funds that “beat the S&P 500”.
If your goal is to rely on an 8% withdraw rate, you are playing it on the edge. I would challenge you to focus on a 4% withdraw rate assumption, that way if 8% withdraw rate could end up working, you would have more money to spend. Rather than relying on an 8% withdraw rate & then needing to take out less.
I am reminded by a quote from The Psychology of Money, which states: “Room for error is key. The more you need specific elements of a plan to be true, the more fragile your financial life becomes. The person with room for error in their strategy for hardship has an edge over the person who gets wiped out when they’re wrong.” The person who relies on an 8% withdraw rate in retirement is more fragile than the person who relies on a 4% withdraw rate in retirement.
All in all, there is obviously truth to what Dave is saying, but at the end of the day, relying on an 8% withdraw, to me, is too risky. For me, my plan is to rely on 4%. Although retirement is a long, long time away for The Decade Investor.
That is good news for you 😉… that means more newsletters to come for A VERY LONG TIME!!!
I want to help you too. I will be able to help you… soon. Stay tuned, I have something coming in the beginning of 2024 that will revolutionize the game for Decade Investors.
(x)Tweet of the Week:
I don’t dislike Dave, so I wrote a thread on his millionaire study & what they found":
Dave Ramsey interviewed 10,000 millionaires to find the secret to building wealth.
This is what he found:
— Decade Investor💸 (@DecadeInvestor)
Nov 17, 2023
Thank you so much for reading & I will see you next week! Until then, keep buying assets.🙂
- Decade Investor