Dave Ramsey rips the 4% rule again today.

[Koolau]

With regards to paying cash for a house, it sounds like even Dave Ramsey isn't "My way or the highway" about it. Searching around, I found this blurb...

“I don’t borrow money, but I don’t yell at people for taking out a 15-year fixed mortgage where the payment is no more than 1/4 of your take-home pay,” said Ramsey during an episode of The Ramsey Show. “Philosophically, I don’t borrow money, so it’s not an option for me.”

FWIW, my first home, a condo, was $84,000 back in 1994. I was 24 years old. I put 5% down. I don't know how long it would have taken me to save up $84,000. If I continued to live at my Grandmom's, and put some effort at it, maybe somewhat quickly. But if I had to move out and pay rent, it wouldn't have been feasible.

So, perhaps it's feasible to think that in 10 years, I could have saved up $84K? Well, 10 years after I bought the condo, I sold it for $185K, so that wouldn't have cut it. For comparison, around the time my condo sold, I had about $130K saved/invested, so I would still have come up short.

It sold again in 2007, for $245K. By then, I think I had about $400K saved/invested, so I could have paid cash. However, a substantial chunk of what I had amassed, was thanks to the sale of that condo, so if I did that, I'd have a free-and-clear home, but not much saved up otherwise.

Now it sold again, during a market low, in 2017 for only $190K. I could have paid cash for it easily by then. In 2022 it went for $278K, and Redfin now thinks it's worth around $313K.

Sometimes I do wish I had stayed at home a bit longer, and saved up a larger down payment. But no way in hell would I have wanted to live with my grandmother until I could afford to pay cash for it!

It just goes to show you that there is good debt and bad debt. Mortgages: (generally) Good. Consumer borrowing: Bad. You'd think DR would know and preach this instead of even suggesting that all debt is bad but YMMV.

 

[Stormy Kromer]

Agree with you.... and I have a low interest rate loan so I do not want to pay it off..


I found it funny meeting a friend of my wife whose husband was a 'financial advisor' (really insurance salesman) but could not handle his own money... he always had financial problems... which lead to them getting divorced after a few years of marriage...

Reminds me of Jimmy Stewart "George Baily" in "Its a wonderful Life" when he got into it with old man Potter when they argued about the "Building and Loan" anfd George giving mortgages to people that Potter's bank declined. Potter suggested that people save more and buy a house later.....George Baily responded "Wait? Wait for what? Do you know how long a working person has to wait to save $5,000 (the cost of a new home at the time.) George Baily said "Is it wrong for a man to want to live in a house with a decent roof and a bath before his children move away?

Off my rant.....save a downpayment and get a big old mortgage and consider that your savings account towards housing costs. Dave Ramsey would have us all living in Potterville until you saved enough to pay cash for a house...when you're dead.

This said I had a 15 year morgage when I bought my house at age 28 in 1993. 7% fixed. I kept it the whole term, best thing I ever did. If I hadn't bought the house it would have increased in value faster than I could have saved money and my rent would have went up too, plus I liked living in my house.

Where did Dave Ramsey get his education and credentials to deserve to be listened to ? I don't dislike him, I just don't know what makes him an expert. He went broke and now tells us how to hande finance. He got rich somehow, tell us how to it how you did it. I trust the old farmer down the road who lived through the depression and fought in WWII and ended up a multi-millionaire more. ( He recently gave his money to charity when he passed. )

Not all wealthy people are what I would consider successful.

 

[Texas Proud]

He's excellent at motivating to get people out of debt and change their money habits. I think if you need that it's good to follow him.

I hadn't known about the 8% rule that's crazy talk. But no more crazy than paying cash for a house. But he does lessen his stance to 15 year fixed. That is also crazy in HCOLA but at least he gives an option.

Was just thinking about this and in a way he is right... if you buy an annuity your payout ratio is 8 to 10% right now... but you have zero when you die...


The problem with this is if you do it yourself you run the risk of living too long and having nothing in your mid 80s...

 

[Out of Steam]

Agree with you.... and I have a low interest rate loan so I do not want to pay it off..

My wife and I also have one of those mortgages that it doesn't make sense to pay off early. It's an odd position to be in.

 

[jazz4cash]

My wife and I also have one of those mortgages that it doesn't make sense to pay off early. It's an odd position to be in.

I call it golden handcuffs. It’s incredible, really.

 

[Out of Steam]

I call it golden handcuffs. It’s incredible, really.

My wife and I had planned to evaluate our living situation in 2026, and to consider moving at that time. The houses we would look at would cost about 30% more, but double our cost of housing.

It wouldn't make sense to move without a compelling reason. Yup, golden handcuffs.

 

[JBTX]

Was just thinking about this and in a way he is right... if you buy an annuity your payout ratio is 8 to 10% right now... but you have zero when you die...


The problem with this is if you do it yourself you run the risk of living too long and having nothing in your mid 80s...

Annuities at those rates are not inflation adjusted.

 

[Finance Dave]

I think DR is wrong on suggesting 8% as a planned withdrawal rate

I do think DR helps many people improve their overall financial condition, especially those in a negative net worth situation.
Pushing actively managed funds with also a 1% AUM fee is where his position is weakest.

Rather than disparage DR, I’ve always tried to glean what I can.

+1

IMO he focuses on a certain slice of consumers, those who are in debt and have not had a lot of financial education or discipline in their life. He has turned around a lot of people. I certainly don't agree with everything he says, but I think his methods have made things a lot better for MANY people.

 

[Dtail]

+1

IMO he focuses on a certain slice of consumers, those who are in debt and have not had a lot of financial education or discipline in their life. He has turned around a lot of people. I certainly don't agree with everything he says, but I think his methods have made things a lot better for MANY people.

And that's it in a nutshell after close to 400 posts.

 

[Walt34]

And that's it in a nutshell after close to 400 posts.

Wisdom does not always come easily or quickly.

 

[Koolau]

Wisdom does not always come easily or quickly.

But at least here on FIRE Forums, it's free.

 

[mathjak107]

I agree and think there is a big blind spot related to Social Security. The 4% rule assumes you are living 100% off your portfolio. Yet most Americans have Social Security (or a government pension instead). Using FIRECalc and entering your SS, you will see that early retirees can spend greater than 4% prior to collecting SS. Enter your SS estimate and use the Investigate tab and solve for spending level. In my case it is something like 4.5% prior to SS, which becomes 3.5% or less after SS. It's not 11%, but it is higher than the 4% rule which ignores other income.

Second is that Dave mostly speaks middle income and lower income people. A lot of folks don't realize that SS is extremely progressive. Study the "bend points" to understand why. It replaces a large portion of lower and even middle income worker's income. So using a "rule" that ignores SS for that demographic is ultra conservative and probably just wrong.

So yea, Ramsey's advice is over-simplified and not too useful for most early-retirement.org members. But I have people in my extended family that definitely could use his program.

a 4% swr is only based on stress testing the capability of your portfolio, period .

it has nothing to do with other income .

once the portfolio is stress tested and a safe draw rate is determined , all other income like ss , pension , annuity , etc just gets added on top of it.

so it has nothing to do with anything but your portfolio capability.

a safe withdrawal rate is based on the worst of times .

however 90% of all the rolling 30 year periods to date have ended with more then you started with using 50-60% equities.

so a system of raises is usually needed other then inflation adjusting or one can die with to much money unspent and not enjoyed .

if we were to eliminate the worst case failures which were those who retired in 1907 , 1929 , 1937 , 1965 and 1966 , a safe withdrawal rate would be about 6-1/2% .

no one knows in advance if their time frame will be a worst case so dave is jumping the gun .

every failure we have had to date is when the first 15 years fell below a 2% real return .

after 15 years even the best of bull markets failed to save that retirement without a pay cut .

pay cuts are exactly what a safe withdrawal seeks to prevent

 

[Time2]

if we were to eliminate the worst case failures which were those who retired in 1907 , 1929 , 1937 , 1965 and 1966 , a safe withdrawal rate would be about 6-1/2% .

Interesting that you list 5 of those worst case failure years in a 59 yr period. But you have none listed in the last 58 years, were there any?

 

[Dtail]

Interesting that you list 5 of those worst case failure years in a 59 yr period. But you have none listed in the last 58 years, were there any?

Not the OP, but don't think there are any so far. The 2008 retiree has quickly recovered. The 2000 retiree is probably in the top 10 of starting periods of worst years to start a retirement.

 

[Andre1969]

Interesting that you list 5 of those worst case failure years in a 59 yr period. But you have none listed in the last 58 years, were there any?

1973 was about the worst one I can think of. In fact, they include it as an example on the FIRECalc home page. However, those other five might have been worse.

It hasn't had time to fully play out yet, but I have a feeling 1999 (or 2000, depending on whether you do your withdrawal on 12/31/99 or 1/1/00) will go down as a bad cycle, as well. I've run calculations, using my own actual rates of return, which will vary compared to FireCalc's results. A 4% WR would have had me run out of money in 2023. Still, 1999 probably won't make it into the Top Five.

 

[RetMD21]

Some of Dave Ramsey's advice is good and some is bad. IDK if most of his fans can tell the difference

 

[mathjak107]

Interesting that you list 5 of those worst case failure years in a 59 yr period. But you have none listed in the last 58 years, were there any?

none as bad as the 30 year period for someone retiring in 1966.

 

[mathjak107]

1973 was about the worst one I can think of. In fact, they include it as an example on the FIRECalc home page. However, those other five might have been worse.

It hasn't had time to fully play out yet, but I have a feeling 1999 (or 2000, depending on whether you do your withdrawal on 12/31/99 or 1/1/00) will go down as a bad cycle, as well. I've run calculations, using my own actual rates of return, which will vary compared to FireCalc's results. A 4% WR would have had me run out of money in 2023. Still, 1999 probably won't make it into the Top Five.

the more recent ones were just on par with some of the below the norm periods but nothing terrible..

Overall looking at the 30 year time frame things look actually pretty normal …this is where those who try to use other time frames get fouled up because when spending down it was the poor first 15 years that did them in


30 year outcomes , are fairly decent

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were: stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%
..


so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
..


so lets look at the first 15 years in those time frames determined to be the worst we ever had.
..

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%
.

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%
.

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%
.

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38% it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

depending on who’s data set and bond types you use those dates were failures and you had to reduce from 4%

 

[Andre1969]

Not the OP, but don't think there are any so far. The 2008 retiree has quickly recovered. The 2000 retiree is probably in the top 10 of starting periods of worst years to start a retirement.

I've only been investing seriously since 1998, but 2000/2001/2002 has been the only period so far, where I've had three down years in a row.

Outside of that, I was down in:
2008 (-42.0%)
2011 (-0.12%)
2018 (-6.9%)
2022 (-20.5%)

In 2015, I was up 1.6%, but inflation no doubt canceled that out. And if I was retired and withdrawing money, that would have definitely sunk me a bit for that year.

 

[Hamlet]

Dave Ramsey is often angrily and aggressively and completely wrong.

He shows zero understanding of sequence of return risk.

I don’t think anyone should look to him for advice on anything, since he seems incapable of actually thinking about anything in a non-rote, dogmatic manner.

Yuck.

 

[YVRRocketSurgery]

Yay, me!

Ditto!

--

Normally I skip the Dave Ramsey related posts but one the podcasts I subscribe to (The Rational Reminder podcast hosted by two Canadian financial planners) had a recent episode with guests discussing/critiquing the claims on this Dave Ramsey show. I finally got around to listening to it after constantly bumping it down the queue and was enjoyed it. However, I kind of refuse to listen to Dave Ramsey nowadays so I'm taking their word at face value as to what Dave's points were.

The guests countering Dave Ramsey's points in the episode are pretty distinguished experts in retirement research space:
David Blanchett
Michael Finke and
Wade Pfau

Topics discussed are:
0:08:23 Why it was decided to respond to Dave Ramsey’s claim that 8% is a safe retirement spending rate
0:10:57 What Ramsey gets wrong about retirement math to justify his 8% spending claim
0:16:47 How important sequence risk is to how investors fund their retirement consumption
0:24:17 How the risk of being in stocks changes at long horizons vs. short horizons
0:26:46 How subjective risk tolerance changes with short-term market fluctuations
0:39:26 Thoughts about Dave Ramsey’s suggestion that the 4% rule is just too depressing
0:48:03 How much dynamic spending strategies improve the initial withdrawal rate
0:52:19 How much variability in income investors need to be prepared for with dynamic spending strategies
0:55:49 When people should be looking past traditional investments and toward other products, like annuities
1:09:02 How impactful the idea of deferring government pensions is

 

[mathjak107]

1973 was about the worst one I can think of. In fact, they include it as an example on the FIRECalc home page. However, those other five might have been worse.

It hasn't had time to fully play out yet, but I have a feeling 1999 (or 2000, depending on whether you do your withdrawal on 12/31/99 or 1/1/00) will go down as a bad cycle, as well. I've run calculations, using my own actual rates of return, which will vary compared to FireCalc's results. A 4% WR would have had me run out of money in 2023. Still, 1999 probably won't make it into the Top Five.

here is a look at 2000 and 2008 as far as worst outcome dates and nope they didn’t do any worse and actually did better than our worst case outcomes.

also all failures are written in stone the first 15 years so that came and went with not much of an issue

EXECUTIVE SUMMARY

The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other "terrible" historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.

Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!


https://www.kitces.com/blog/how-has...he-tech-bubble-and-the-2008-financial-crisis/

 

[mathjak107]

Ditto!

--

Normally I skip the Dave Ramsey related posts but one the podcasts I subscribe to (The Rational Reminder podcast hosted by two Canadian financial planners) had a recent episode with guests discussing/critiquing the claims on this Dave Ramsey show. I finally got around to listening to it after constantly bumping it down the queue and was enjoyed it. However, I kind of refuse to listen to Dave Ramsey nowadays so I'm taking their word at face value as to what Dave's points were.

The guests countering Dave Ramsey's points in the episode are pretty distinguished experts in retirement research space:
David Blanchett
Michael Finke and
Wade Pfau

Topics discussed are:
0:08:23 Why it was decided to respond to Dave Ramsey’s claim that 8% is a safe retirement spending rate
0:10:57 What Ramsey gets wrong about retirement math to justify his 8% spending claim
0:16:47 How important sequence risk is to how investors fund their retirement consumption
0:24:17 How the risk of being in stocks changes at long horizons vs. short horizons
0:26:46 How subjective risk tolerance changes with short-term market fluctuations
0:39:26 Thoughts about Dave Ramsey’s suggestion that the 4% rule is just too depressing
0:48:03 How much dynamic spending strategies improve the initial withdrawal rate
0:52:19 How much variability in income investors need to be prepared for with dynamic spending strategies
0:55:49 When people should be looking past traditional investments and toward other products, like annuities
1:09:02 How impactful the idea of deferring government pensions is

excellent video .

should be required watching for every retiree living off their savings

 

[Wile E. Coyote]

Someone probably already said this; but, I think the value of DR is how he gets people to get control of their debt, their budget and improve their employment situation. He loses me on most of the rest of what he talks about (the sales pitch parts especially).

 

[mathjak107]

Someone probably already said this; but, I think the value of DR is how he gets people to get control of their debt, their budget and improve their employment situation. He loses me on most of the rest of what he talks about (the sales pitch parts especially).

like suzie orman , they cater to their flock of financial misfits for the most part .

but dave’s advice here can be outright dangerous