Dave Ramsey rips the 4% rule again today.

[Koolau]

I never watch or listen to Dave Ramsey. Pretty unbelievable that he's recommending up to 10% withdrawal rate. What a way to set people up to fail. That's some pretty terrible advice, as the video above shows.

I've mentioned a co-w*rker (actually, a direct report.) He announced that he and his broker had decided he would retire in X months. He was gloating about how his broker had it all figured out (puts and calls for extra income as I recall) and that the broker had assured him he could draw 8% of the starting amount or more every single year.

Heh, heh, so 2 years into his ER, the guy was almost out of money and w*rking again - repositioning cars. I think he might have gotten $10/hour for doing the "hiring" of 2nd driver (like me - IIRC I got $0.15/mile) plus driving the other car. He made extra money if he ushered say 8 or 10 drivers to the car auction (maybe $5/car?) So, not a great life IMHO. But it w*rked for him - though not the life he had envisioned, I'm sure.

I was only doing the repositioning myself to help the guy out and to get a chance to drive some fairly nice cars (not to mention some really bad ones - to the auction.)

 

[FREE866]

While I have never listened to Mr. Ramsey, the idea that someone with an all stock portfolio could actually withdrawal 10% of his/her portfolio is not crazy at all (inflation adjusted - but not to be confused with the 4% rule/style where that initial amount is fixed).

Sure, you’ll have some years where your portfolio dips and you don’t get the same withdrawal amount as the year prior but take a look at how the following Portfolio Visualizer result looks using this strategy for the past 51 years from 1972 - 2023 (Note that 1973 and 1974 were two big/horrible years for the market too). Granted, if you absolutely needed a hard budget then the Bengen 4% rule is a much better guide. For those of us with some flexibility, the Ramsey approach isn’t horrible and quite honestly it more closely matches what we do (spend a little more when the market is good and cut back during a bear market).

https://www.portfoliovisualizer.com...o+3&asset1=TotalStockMarket&allocation1_1=100

That is really amazing. I just mentally would have an issue spending 10% of portfolio and honestly have no need or want thankfully. I'm at about a third of that and the portfolio is up ~50 % including withdrawals in almost 7 years. The stock market is just an incredible vehicle to increase net worth over time.

 

[donheff]

While I have never listened to Mr. Ramsey, the idea that someone with an all stock portfolio could actually withdrawal 10% of his/her portfolio is not crazy at all (inflation adjusted - but not to be confused with the 4% rule/style where that initial amount is fixed).

Sure, you’ll have some years where your portfolio dips and you don’t get the same withdrawal amount as the year prior but take a look at how the following Portfolio Visualizer result looks using this strategy for the past 51 years from 1972 - 2023 (Note that 1973 and 1974 were two big/horrible years for the market too). Granted, if you absolutely needed a hard budget then the Bengen 4% rule is a much better guide. For those of us with some flexibility, the Ramsey approach isn’t horrible and quite honestly it more closely matches what we do (spend a little more when the market is good and cut back during a bear market).

https://www.portfoliovisualizer.com...o+3&asset1=TotalStockMarket&allocation1_1=100

That is an interesting chart. You did say the dollars shown are inflation adjusted, correct? That would make a huge difference.

 

[donheff]

That is an interesting chart. You did say the dollars shown are inflation adjusted, correct? That would make a huge difference.

I never looked at these charts before. Now that I do I am confused as hell. If I click on the inflation adjusted box, the portfolio yearly ending balance drops like a stone. From $2M it is down to $525K in 1982, then back up a bit and finally down to $250K in 2022. But while the portfolio seems to be decimated, the withdrawal chart keeps rolling along, showing a $169K withdrawal in 1982 and a $147K withdrawal today. If I turn off the inflation adjustment box, the portfolio looks like it is coordinated with a 10% withdrawal.

My takeaway is that only the portfolio is view can be adjusted for inflation. If the 10% withdrawals were adjusted for inflation, they would drop to $53K in 1983 and $25K 2022. That sounds about right since a quick lookup of a 1972 dollar today shows $7 value in 2022. If I divide the 2022 withdraw by 7 I get $21K which is in the ballpark of the chart.

In the meantime, the traditionalist would have been withdrawing a nice safe, inflation adjusted $80K every year.

Am I missing something important? I am always leery of trusting charts and predictions I don't really understand.

 

[Andre1969]

I could see pulling 10% out of your portfolio every once in awhile, if your portfolio had a good run. Now I'm still working, so it's not quite the same thing, but back in 2018, when I bought my house, the down payment was a bit over 10% of my portfolio, measured from the start of the year at least.

Looking back on that year, I started with about $1.727M
By August 31, I was up to $1.96M.
Down payment, on 9/7 (plus the initial deposit and various inspections) were around $178k.
On 9/29/18, I was at $1.798M. Even though I spent all that money, I did make a little bit of it back.
However, by 12/31/18, I was down to $1.562M.

I could have afforded to take out similar amounts in 2019, 2020, and 2021. Overall I had returns of 27%, 13.2%, and 18%, respectively. But, if I had done so, I would have started 2022 with a portfolio considerably less than the ~$2.5M I had. And taking a big chunk out like that in 2022 would definitely have hurt, considering I took a ~20.5% hit that year.

Actually thinking back, I did make another major purchase in 2021, having a large garage built. All told, with site prep, taking a few trees down, jumping through a few hoops the county made me do, etc, I was probably into that garage $95-100K. I started 2021 at around $2.219M, and finished it with $2.561M. So that garage was around 4.2-4.5 of my starting portfolio. Doesn't sound too bad, except it was a one-time thing, on top of my regular spend rate. So if I was retired and depending on my portfolio, it would have represented a pretty substantial bump for that year.

 

[ERD50]

That is an interesting chart. You did say the dollars shown are inflation adjusted, correct? That would make a huge difference.

It's weird - if you click inflation adjusted, it affects the portfolio balance, but not the chart on withdrawals.

For easier math, I changed to starting $ to $1M, so 10% is just a decimal shift.

-ERD50

 

[ERD50]

Nope. DR claims 10% in perpetuity without touching the principal. It’s not clear to me that he is suggesting variable withdrawals.

Does he? I don't see how you could do that unless your portfolio was kicking off a steady 10% in dividends.

I'm pretty sure you need to dig into principal to take 10%. But then again, DR is prone to using some fuzzy math. I've mentioned before, he uses *average* returns for the market, rather than the useful Compound Annual Growth Rate (CAGR) number.

Quick example, a portfolio that dropped 50% (.5x) one year, and 150% (1.5x) the next has an average return of zero ( (.5+1.5)/2 = 1.0x). A $1M portfolio drops to $500K, then 1.5x brings you to 750K. A $250K loss, but DR says you are whole!

-ERD50

 

[donheff]

It's weird - if you click inflation adjusted, it affects the portfolio balance, but not the chart on withdrawals.

For easier math, I changed to starting $ to $1M, so 10% is just a decimal shift.

-ERD50

Did you see my follow-up remarks? I think the withdrawal amounts are not inflation adjusted and, therefore, enormously misleading. But I am not sure.

 

[Andre1969]

Does he? I don't see how you could do that unless your portfolio was kicking off a steady 10% in dividends.

I'm pretty sure you need to dig into principal to take 10%. But then again, DR is prone to using some fuzzy math. I've mentioned before, he uses *average* returns for the market, rather than the useful Compound Annual Growth Rate (CAGR) number.

Quick example, a portfolio that dropped 50% (.5x) one year, and 150% (1.5x) the next has an average return of zero ( (.5+1.5)/2 = 1.0x). A $1M portfolio drops to $500K, then 1.5x brings you to 750K. A $250K loss, but DR says you are whole!

-ERD50

From what I've heard him say, the SP500 averages something like 11.5% per year, so you can withdraw 10% in perpetuity, without ever touching the principal.

That may not be the exact wording, but it's the gist of it. Dangerous advise, in my opinion. It also doesn't take into account the fact that it's not like some kind of money market account on steroids, throwing off 11.5% or whatever per year for you to spend. Instead you're actually having to sell an asset, either mutual fund shares or individual stock shares. So, if you're selling an asset that's been throwing off dividends, or had appreciation, in a way I look at that as a form of cutting into your principal.

Maybe not in the strictest sense, as you still might be at a profit, but when you sell portions of an asset, you now have fewer shares that have to earn more money for you. So in a way, I think of that as "cutting into the principal".

 

[ERD50]

Did you see my follow-up remarks? I think the withdrawal amounts are not inflation adjusted and, therefore, enormously misleading. But I am not sure.

No, I missed that post (didn't refresh), but while the chart is screwy on that, it doesn't change anything. It still shows taking 10% of the portfolio each year.

So change the start $ to $1M for EZ math, then the withdraw is just 10% of the inflation adjusted portfolio balance, so that withdrawal is in today's (well, starting date) dollars.

-ERD50

 

[Bigdawg]

From what I've heard him say, the SP500 averages something like 11.5% per year, so you can withdraw 10% in perpetuity, without ever touching the principal.

That may not be the exact wording, but it's the gist of it. Dangerous advice, in my opinion.

Anyone who blindly follows advice from one source is doomed to fail. I use all of this advice (DR, Suzy Orman, 4% rule, ER.org, etc...) as intel that goes into my overall plan. I plug all of that advice along with mortgage payoff strategies, when to take SS and when to retire and put them into my planning process. That plan evolves monthly. IF I was following someone like DR, I would adjust accordingly as I moved along in time. I don't fault DR for putting out advice to the general public in blanket strategies like that. It should (in my mind) get people thinking about their finances and begin their financial planning. If there are folks out there blindly following someone like DR, I would tell them to use that advice/plan as a starting point and adjust accordingly as conditions change.

 

[ERD50]

All withdrawal plans have their pros and cons ERD50. ...

Yep, there's no rabbet to pull out of the hat. There's $X, and you can do some strategic timing to match a scenario, but that's about all.

... Personally, I don't use or recommend any withdrawal plan. I play it by ear, month by month and year by year, managing my WR and AA based on my understanding of historical data and predicted trends. And I try to be aware of all the popular recommendations and their pros and cons. ...

Yep, I've used the calculators and spreadsheets to get a general handle on things, to gain some confidence that I'm unlikely to deplete my stash in my/DW's lifetimes. But I never understand some of the comments about 'slavishly' sticking to X%. Heck, my spending is all over the place, depending on needs/wants - but I'm aware of the averages, and how any early spending creates a bit of a SORR-scenario.

... So far, 18 years in, I've apparently been too conservative. But that only becomes observable after the time has past......... Now I'm paying particular attention to the "gifting with a warm hand" thread" !

Me too, but as comes up in so many threads, I'd rather have a stash to draw from that I might need/want later in life, than to have to scrimp in my old age. If I pass on a bunch to heirs/charity, fine.

I'm managing Roth conversions for the next few years, am planning on the "gifting with a warm hand" approach once RMDs kick in. That's all taxable income anyhow, so I'm more flexible, and with DW's small current pension (IMRF didn't have any delay option for DW), my delayed pension and our combined SS, I won't really need much from the stash at that time anyhow.

I'll look into it more at the time, I (think I) know that charitable contributions can be made directly from an IRA to avoid the tax on that, maybe that option exists for 529 plans? I'll check into that.

-ERD50

 

[Time2]

Sheesh! I'm searching Commercial Real estate brokers to sell a property I have. Now my first hit is,
"Ramsey Solutions, Dave Ramsey Endorsed Agents Dave Ramsey endorsed Agents." Dave Ramsey Endorsed Agents

 

[GenXguy]

While I have never listened to Mr. Ramsey, the idea that someone with an all stock portfolio could actually withdrawal 10% of his/her portfolio is not crazy at all (inflation adjusted - but not to be confused with the 4% rule/style where that initial amount is fixed).

The 4% rule is inflation adjusted each year. Not sure why you think that only the 10% David Ramsey advice adjusts for inflation.

Watch that video posted above. Maybe that will clarify how risky it is increasing the WR, let alone to 10%!

 

[donheff]

No, I missed that post (didn't refresh), but while the chart is screwy on that, it doesn't change anything. It still shows taking 10% of the portfolio each year.

So change the start $ to $1M for EZ math, then the withdraw is just 10% of the inflation adjusted portfolio balance, so that withdrawal is in today's (well, starting date) dollars.

-ERD50

But is today’s 10% $170k or $25k. I think it’s $25k in inflation adjusted dollars

 

[obsessed]

But is today’s 10% $170k or $25k. I think it’s $25k in inflation adjusted dollars

I believe so, meanwhile that 4% rule following lemming is now withdrawing $560K a year and still has a substantial portfolio.

 

[ERD50]

But is today’s 10% $170k or $25k. I think it’s $25k in inflation adjusted dollars

I believe so, meanwhile that 4% rule following lemming is now withdrawing $560K a year and still has a substantial portfolio.

Let's use specific numbers/times for clarity:

I set the portfolio Balance to "Inflation Adjusted", and set beginning balance to $1,000,000 for easy math and $40,000 = the 'inflation adjusted 4%' plan.

AUG 31, 2023 - Inflation adjusted Balance = $105,103. So a 10% withdraw would be $10,510.30 and that would be "today's" $.

A long cry from a $40,000 inflation adjusted withdraw (but the 4% portfolio, I think, would be bust by now - WHICH IS WHY FOR LONG RETIREMENTS, MANY OF US SAY GO MORE CONSERVATIVE, LIKE 3%). But of course, there were a couple of years > $80K, and another year or two above $60K. And many below $40K (even just looking out to 2002, 30 years from 1972 (the defaults on a typical 4% run on FIRECalc).

So the 2005 WD would be $19,602 (based on EOY portfolio).

-ERD50

 

[ERD50]

UPDATE to my previous post.

A $40K inflation adjusted w/d looks way better than the 10% of portfolio.

I'll try posting images, but by 2005, the 4% portfolio balance (inflation adjusted) is ~ $850K, and growing.

I set to 75/25 AA, their US Total bond only foes back to 1987, so I used 10 tear Treasuries.-

images WIP
-ERD50

 

[ERD50]

Here, did I make a mistake?

Short links to the data (you need to select "Inflation Adjusted" for the graph, the link doesn't set that):

10% of portfolio: https://tinyurl.com/2ae9nyyw
4% Infl adjusted: https://tinyurl.com/2373nlu3


-ERD50

 

[NW-Bound]

While I have never listened to Mr. Ramsey, the idea that someone with an all stock portfolio could actually withdrawal 10% of his/her portfolio is not crazy at all (inflation adjusted - but not to be confused with the 4% rule/style where that initial amount is fixed).

Sure, you’ll have some years where your portfolio dips and you don’t get the same withdrawal amount as the year prior but take a look at how the following Portfolio Visualizer result looks using this strategy for the past 51 years from 1972 - 2023 (Note that 1973 and 1974 were two big/horrible years for the market too). Granted, if you absolutely needed a hard budget then the Bengen 4% rule is a much better guide. For those of us with some flexibility, the Ramsey approach isn’t horrible and quite honestly it more closely matches what we do (spend a little more when the market is good and cut back during a bear market).

https://www.portfoliovisualizer.com...o+3&asset1=TotalStockMarket&allocation1_1=100

This 10% WR cannot be compared to the 4% SWR. The 4% SWR is relative to the initial portfolio, and adjusted each year to compensate for the inflation. On the other hand, Portfolio Analyzer shows 10% WR relative to the portfolio each year.

At the beginning in 1971, starting out with $2M, you withdrew $200K. After living large for more than 50 years, your stash is now $1.57M, and you withdraw $157K.

But the above numbers are in nominal values.

Cumulative inflation since 1971 is 6.47x. In order to have the same purchasing power as the $200K back in 1971, you will need $1294K in today's dollars.

 

[NW-Bound]

Here, did I make a mistake?

Short links to the data (you need to select "Inflation Adjusted" for the graph, the link doesn't set that):

10% of portfolio: https://tinyurl.com/2ae9nyyw
4% Infl adjusted: https://tinyurl.com/2373nlu3

-ERD50

The software has a bug. It does not adjust the WR amount for inflation.

 

[NW-Bound]

From what I've heard him say, the SP500 averages something like 11.5% per year, so you can withdraw 10% in perpetuity, without ever touching the principal.

That may not be the exact wording, but it's the gist of it. Dangerous advise, in my opinion. It also doesn't take into account the fact that it's not like some kind of money market account on steroids, throwing off 11.5% or whatever per year for you to spend. Instead you're actually having to sell an asset, either mutual fund shares or individual stock shares. So, if you're selling an asset that's been throwing off dividends, or had appreciation, in a way I look at that as a form of cutting into your principal.

Maybe not in the strictest sense, as you still might be at a profit, but when you sell portions of an asset, you now have fewer shares that have to earn more money for you. So in a way, I think of that as "cutting into the principal".

Yes, of course one cuts into his principal if he does not allow for inflation.

If your CD throws off 5% while inflation is 3%, what happens if you withdraw 5%? Of course your principal shrinks 3% due to inflation because you eat into that. You should withdraw only 2%, which is the true yield.

Same thing with stock. Stocks return 10% on the average, but in the past inflation ran as high as 14%/year. Did not leave one with much true yield, did it?

 

[ERD50]

The software has a bug. It does not adjust the WR amount for inflation.

Sure it does. I deselected "Inflation adjusted" under "Withdrawal Amount", and the ending balance changed ~ 10x.

A confusing point is there is an "Inflation Adjustment" for the withdrawals, and an "Inflation Adjustment" for the graph of portfolio balance.

The 10% is not meant to be inflation adjusted, it is 10% of whatever the portfolio balance is. But if you click "Inflation adjusted" under the graph of Portfolio Balance, you can take 10% of that value to see what you would take out for spend on an inflation adjusted basis.

I noticed, the link I used was for a 75/25 AA, but not relevant to this inflation question.

-ERD50

 

[NW-Bound]

People ignore inflation risk at their peril. By the time they understand it, it's too late. There's no mulligan.

 

[NW-Bound]

Sure it does. I deselected "Inflation adjusted" under "Withdrawal Amount", and the ending balance changed ~ 10x.

-ERD50

What I meant was that the option recomputes the ending balance to the value of the 1971 dollar, but it does not do that for the WR amount.