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Dave Ramsey on Neil Cavuto today
Old 07-10-2012, 05:43 PM   #1
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Dave Ramsey on Neil Cavuto today

I was reading the paper and the TV was on FNC when DR came on. I started to hear what sounded like outrageous comments (gee from Dave, really? ) so when I was done reading the paper I went back and took notes, the DVR automatically records 1 hour of the channel you are on.

The discussion was about not saving enough for retirement. So this is what DR said -

Take an average 30 year old making $48,000 per year and if he saves 15% per year which is $7,200 from age 30 to 70 he will have $7.4M in a Roth IRA.

That is exactly what he said!

Now I question whether a 30 year old would be able to save that much from that level salary. There was no mention of salary increases therefore we are talking about $7,200 X 40 years = a measly $288,000 saved. Now I know all about the wonder of compounding but genius Dave never mentioned a return rate, how convenient. I guess he thinks you'll earn what 12% or 18% every year for 40 years? But wait, the Roth IRA contribution limits for 2012 are $5,000 if you're under age 50 and $6,000 if you're over age 50. So the 30 year old comes up short $2,200 a year for 20 years and then is short $1,200 for the next 20 years but that's just details I guess. But here's what really caught my attention, at age 70 your safe withdrawal rate from the Roth is 8%.

Amazing isn't it? How did we all manage to FIRE without Dave's help and do it in our late 40's or 50's or early 60's, that's what I want to know.
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Old 07-10-2012, 06:14 PM   #2
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The 30-year-old is married, so she and her spouse could put $10,000 together in Roth IRAs.
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Old 07-10-2012, 06:32 PM   #3
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DR says you can earn 14% easily by looking at Morningstar and searching for funds that generated at least that much return over 15+ yrs. He really believes this. He says market return has been 11% so it's ok to use SWR of 8%.

Obviously, I wouldn't listen to his investment advice. However, I think he does a great job of coaching people about managing debt and money relationship with family/other people.
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Old 07-10-2012, 06:46 PM   #4
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But here's what really caught my attention, at age 70 your safe withdrawal rate from the Roth is 8%.
8% is not a safe withdrawal rate at that age. But believe it or not it is a reasonable rate. There is some basis for what he says...

A 70 year old man has a life expectancy of around 15-17 years (per the IRS). Using that time frame, I notice that Fidelity (and probably others) have a target payout rate of around 7.31 to 8.03 percent in their Income replacement funds. Other institutions I would opine may also have similar target payout rates.

absolutely Safe - No probably not
reasonable and likely safe - probably so.
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Old 07-11-2012, 08:23 AM   #5
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Old 07-11-2012, 09:29 AM   #6
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If you just add the same $7,200 per year, and simple interest, the rate required is about 13% return per year. Anybody know a nice investment that guarantees me 13% return per year for 40 years?
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Old 07-11-2012, 09:52 AM   #7
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If you just add the same $7,200 per year, and simple interest, the rate required is about 13% return per year. Anybody know a nice investment that guarantees me 13% return per year for 40 years?
Yeah, no problem. Send it to me.


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Old 07-11-2012, 09:53 AM   #8
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I'm sure you could do this. You just need an employer match of what, 500 percent?
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Old 07-11-2012, 10:09 AM   #9
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Ok, he starts at $7,200 per year, increases his contribution by 3% each year. His company adds a 50% match each year.

He needs a little better than 10.5% return each year for 40 years to get $7,200,000.
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Old 07-11-2012, 10:11 AM   #10
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There's a whole thread over on Get Rich Slowly dedicated to exposing Dave's dumb investment advice.

In summary, Dave honestly believes that it is easy to earn 12% return consistently, because historically, over the past hundred years, that's what the market has returned, on average. Just find a good, growth stock mutual fund with at least a 10-15 year track record, and remain 100% invested in equities (no bonds or CD's - "Certificates of Depression" as he calls them), all the way through retirement. It will average 12%, meaning you can pull out 8% safely, leaving 4% in there to balance out inflation.

He really believes this stuff, and has said it consistently on his podcasts for years.
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Old 07-11-2012, 10:13 AM   #11
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It's not so hard as some suggest. What we are missing here is the salary increase. Start at $48K, contribute 15% to the Roth. Then, get 8% return on investment and an 8% salary increase every year, and always contribute 15%. Don't think about Roth limits, college for kids, or anything else .. too distracting. It's simple as 8/8, as in 8% yearly salary increase and 8% return on investment. That should be easy to do...
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Old 07-11-2012, 10:15 AM   #12
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Cavuto should asked how one would achieve such a return rate if they used DR's endorsed local provider?

John Greaney has provide a nice analysis

The Dave Ramsey Endorsed Local Provider (ELP) Shaft Detector
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Old 07-11-2012, 10:22 AM   #13
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I know that we "superior folk" on this forum can poke holes in whatever any "talking head" may say, I would think that the primary message - that being invest early, invest long term, is beyond the knowledge scope of the average TV viewer (regardless of your political bent, and network of your choice).

While I can't agree with the "raw numbers" provided by Dave R. I can understand his basic message.

Save (as much as you can) and as early as you can. As far as returns, and possible WD rates of decades in the future, only fate can tell.

Just my simple POV on the thread subject.
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Old 07-11-2012, 12:18 PM   #14
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It's not so hard as some suggest. What we are missing here is the salary increase. Start at $48K, contribute 15% to the Roth. Then, get 8% return on investment and an 8% salary increase every year, and always contribute 15%. Don't think about Roth limits, college for kids, or anything else .. too distracting. It's simple as 8/8, as in 8% yearly salary increase and 8% return on investment. That should be easy to do...
Hmm. Where to start? For one thing, a household not yet setting *any* of a $48K income aside will have trouble suddenly chopping $7,200 a year out of the budget. Yes, they can probably start with 3-5%, then add a couple of percentage points every year without too much pain. But not many households on $48K can suddenly find $600 a month to set aside in one fell swoop. Especially when they have already been dealing with wages not keeping up with inflation on essential goods and services for several years (on average).

Also -- 8% annual salary increases? Wow... where are they? My salary has increased 2% in the last 6 years. Not 2% a year for 6 years.... 2% total. And I am far from alone. It's rare these days to get a 2% raise once in a while, let alone 8% a year. Frankly I think 12% annual return on investments (as Ramsey often uses) is more realistic than assuming 8% annual wage growth. And I don't find Ramsey's 12% claim to be very realistic.
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Old 07-11-2012, 01:50 PM   #15
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Obviously, I wouldn't listen to his investment advice. However, I think he does a great job of coaching people about managing debt and money relationship with family/other people.

+1.
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Old 07-11-2012, 02:13 PM   #16
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Dave's often quoted "growth stock mutual fund" with 12% returns since the beginning of time is AIVSX... American Funds Class A shares...

AIVSX American Funds Invmt Co of America A Fund AIVSX Quote Price News

Dave provides some great advice on reducing debt and living debt free but his investment numbers are horribly exaggerated. Most of the numbers he tosses around relative to salaries and budgets are based off of gross numbers... for example, someone will call in and say they earn $80k/year and he will advise them to live on $40k and put the remaining $40k towards debt. I'm not sure where the IRS and other government allocations come into play in his calculations but I suspect he doesn't have time to do the math on the spot. The same thing goes with his calculations of what money will grow to if invested in said shares of growth stock mutual funds (averaging only 5% returns over the past 10 years, btw, and not the 12% since 1934). I think his advice comes with motivation when he uses those numbers to the financially uneducated but those in the know do take it with a grain of salt. This is where some of the discrepancy in his math in the example cited in this thread comes from.

BTW, this is my first post in these forums but I've been educated and grateful for the insight to all who contribute in what I've read. Thank you for the candid discussions here.

I'm off to introduce my self in the introduction forum now
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Old 07-11-2012, 02:40 PM   #17
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He really believes this stuff, and has said it consistently on his podcasts for years.
Hasn't Dave also remarked about going broke too? Maybe this kind of fuzzy math contributed to his past problems.
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Old 07-11-2012, 02:54 PM   #18
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I think we're being a bit harsh on Dave lol.

He gets a very short time on Neil's program to get across a point, so he has to make some quick assumptions. I agree his expected rates of return are on the high side, but if you do retire at 70 then 8%/year may not be too extreme of a withdrawal rate. Also, as many have said, you will likely get some raises annually to make the numbers look better...or at least a promotion every 6-8 years.

You must admit that the overall point he was trying to make is to invest a lot (15%), invest it for a long time (40 years), and put it in a growth investment (stocks) is a plan most of us would agree with. It's just around some of the details that his point falls apart.

The one thing he did NOT mention is...what will $7M be worth in 40 years? Certainly not what $7M is worth today! I did a quick calculation, and at 3% inflation, you'd need $331k to buy in 40 years what you could buy today for $100k!!! People will NEED $7M to FIRE in 40 years. LOL
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Old 07-11-2012, 02:58 PM   #19
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Hasn't Dave also remarked about going broke too? Maybe this kind of fuzzy math contributed to his past problems.
The cause for Dave going broke (yes he did) had nothing to do with fuzzy math. He has spoken about and written about it quite a bit. The cause was that he bought way too much property on debt, and when the banks were taken over, he was unable to refinance the loans, so the banks called them all immediately...and he was sunk. His entire program now is based on what he learned about debt from that experience.
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Old 07-11-2012, 03:01 PM   #20
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Wage growth is going to vary wildly.

For most people, it will start very strong at the beginning of their career and taper off at the end.

From the start of my career after college until now (about 16 years), 8% is actually pretty close for me. I started very low out of college, but ramped up very quickly. I'm unlikely to beat inflation going forward though.

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Also -- 8% annual salary increases? Wow... where are they? My salary has increased 2% in the last 6 years. Not 2% a year for 6 years.... 2% total. And I am far from alone. It's rare these days to get a 2% raise once in a while, let alone 8% a year. Frankly I think 12% annual return on investments (as Ramsey often uses) is more realistic than assuming 8% annual wage growth. And I don't find Ramsey's 12% claim to be very realistic.
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