Ramsey made me think twice... $3.5M PF earning 100k/yr...

[pjigar]

And yet there are others in the same “system” who don’t make these stupid decisions.

I think people who reject the "system" (a lot of us on this forum) are wired differently: Think of Neo from the Matrix. Most people just want to stand with the crowd: Safety in numbers.

A potential explanation of how this system evolved:

How This All Happened

This is a short story about what happened to the U.S.

collabfund.com

A couple of quotes from the blog above:
"Expectations always move slower than facts. And the economic facts of the years between the early 1970s through the early 2000s were that growth continued, but became more uneven, yet people’s expectations of how their lifestyle should compare to their peers did not change."
......
"All that matters is that sharp inequality became a force over the last 35 years, and it happened during a period where, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable."

 

[COcheesehead]

I think people who reject the "system" (a lot of us on this forum) are wired differently: Think of Neo from the Matrix. Most people just want to stand with the crowd: Safety in numbers.

A potential explanation of how this system evolved:

How This All Happened

This is a short story about what happened to the U.S.

collabfund.com

A couple of quotes from the blog above:
"Expectations always move slower than facts. And the economic facts of the years between the early 1970s through the early 2000s were that growth continued, but became more uneven, yet people’s expectations of how their lifestyle should compare to their peers did not change."
......
"All that matters is that sharp inequality became a force over the last 35 years, and it happened during a period where, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable."

A lot, most? of the people I know do their own thing. I can’t think of an example of someone in my neighborhood, family or circle of friends trying to keep up with the Jones. There’s a lot of “quiet” money in those circles and people do as they please. The richest guy I know drives a Forester.

 

[pjigar]

A lot, most? of the people I know do their own thing. I can’t think of an example of someone in my neighborhood, family or circle of friends trying to keep up with the Jones. There’s a lot of “quiet” money in those circles and people do as they please. There’s richest guy I know drives a Forester.

We tend to know and be surrounded by people like us so your observation is accurate. But if you look at the population as a whole and look at the statistics then you quickly realize the cracks in the society.
Income distribution
debt distribution
asset distribution
debt-to-income ratio of people in every quantile of income: Keeping Up with Household Debt in the US – Levy Economics Institute of Bard College
etc.

For example: I have a few family members who have hourly low paying jobs. They spend on frivolous things that I would never spend a dime on and they don't have a lot of extra dimes. The reason they spend like there is no tomorrow is because spending is the only thing that brings joy in their otherwise difficult life. YMMV.

 

[pb4uski]

The average yearly return of the S&P 500 is 10.445% over the last 100 years, as of the end of December 2025. - From google

Even if we accept the 10.445% "average", it isn't the average that is important... it is the sequence of the returns that result in the 10.445% average not to mention the fact that withdrawals are inflation adjusted and increase each year... probably 3% annually on average over that same 100 years. Also, I doubt that he or anyone suggests that a retirement invest 100% in the S&P 500. The 4% rule from the Trinity Study was based on a 60/40 AA.

Dave's investment and withdrawal advice are poor at best and potentially dangerous.

 

[pb4uski]

If your $3.5M can earn 4%, that is $140k. It depends on what you need. I would set up your portfolio to generate what you need after you stop work.

You need to consider that withdrawals need to be inflation adjusted to maintain standard of living. That is part of the reason why the withdrawal rate is less than the investment earnings rate.

 

[jazz4cash]

Even if we accept the 10.445% "average", it isn't the average that is important... it is the sequence of the returns that result in the 10.445% average not to mention the fact that withdrawals are inflation adjusted and increase each year... probably 3% annually on average over that same 100 years. Also, I doubt that he or anyone suggests that a retirement invest 100% in the S&P 500. The 4% rule from the Trinity Study was based on a 60/40 AA.

Dave's investment and withdrawal advice are poor at best and potentially dangerous.

I do recall DR made some really disparaging comments wrt the 4% SWR guideline, how it was developed, and the people that developed it.

 

[dickoncapecod]

How can anyone struggle with the famous 4% withdrawal rate. Treasurys beyond 10yrs yiels 4.25% to 4.75%. Solid corporates 6-7%. Lots of fixed income CEFs yield 8%-15%. ANYONE can create a portfolio they can withdraw 4% from AND reinvest an excess without selling any holdings......?
Regards, Dick

 

[jazz4cash]

It’s not so much they struggle with it as believing they can safely take 2-3x of the 4% guideline

 

[pb4uski]

Yes, it is counter intuitive that a 4% safe withdrawal rate is lower than a 8-9% average yield from a 60/40 portfolio until one factors in sequence of returns and, importantly, inflation adjusted withdrawals at 2-3% annually.

 

[Dtail]

Yes, it is counter intuitive that a 4% safe withdrawal rate is lower than a 8-9% average yield from a 60/40 portfolio until one factors in sequence of returns and, importantly, inflation adjusted withdrawals at 2-3% annually.

Yup, before Bengen came along, Peter Lynch of Magellan fame was espousing a 7% WR%.
Avg stock return 10%, 3% inflation rate, net 7% WR.

 

[pb4uski]

If you do not adjust withdrawals for inflation then the safe withdrawal rate jumps to ~7%... so it is inflation adjusted withdawals that principally impacts the safe withdrawals rate compared to the investment earnings rate with sequence of returns being a less significant factor.

 

[HarveyS]

I'm a Ramsey fan and I enjoy the show. For the most part, I agree with his advice. Helping people get out of debt and get control of their finances is a good thing. In my opinion, the advice gets a bit out of his depth when he starts talking WR because he looks at WR based on NW, not invested assets/portfolio value. So, home value, which is a large percentage of folks NW in many cases, is included in the WR calculation. I don't think a WR is sustainable if you take 4% of your home value plus 4% of your portfolio every year. Even if your home appreciates at 10% per year, you have to live somewhere.
Naturally, WR is complicated by pensions, annuities, SS, etc..

Also, while he himself invests in plenty of real estate, he suggests his listeners invest 100% in equities (0% bonds). But, to be fair, he also wants his listeners to have a fully paid for home, so there is some diversity in that. And, for many of his listeners, home value is a large percent of net worth, so maybe they are approaching a 60/40 ratio when their home is paid for. I don't know.

I have also seen a drop in consistency of message. Again, my opinion, but some of the new personalities don't always give out advice that is 100% spot on with the relatively simple Ramsey formula and I have only very rarely heard of any correction to earlier advice.

 

[Original Wally]

keep up with the Jones.

Just who do the Jones keep up with LOL

 

[dickoncapecod]

Yes, it is counter intuitive that a 4% safe withdrawal rate is lower than a 8-9% average yield from a 60/40 portfolio until one factors in sequence of returns and, importantly, inflation adjusted withdrawals at 2-3% annually.

Understood....of course if you create the portfolio out of actively managed bond-ish income products and forget the stocks, then you are no longer having to sell assets to withdraw 4% plus inflation. Sequence of returns risk is also reduced. Of course, there is a critical difference in strategies based on portfolio size/wealth level. These problems largely disappear if 8% on (say) $3 million funds any reasonable withdrawal AND leave monthly dollars to be reinvested for the kids.
Regards, Dick

 

[jazz4cash]

I'm a Ramsey fan and I enjoy the show. For the most part, I agree with his advice. Helping people get out of debt and get control of their finances is a good thing. In my opinion, the advice gets a bit out of his depth when he starts talking WR because he looks at WR based on NW, not invested assets/portfolio value. So, home value, which is a large percentage of folks NW in many cases, is included in the WR calculation. I don't think a WR is sustainable if you take 4% of your home value plus 4% of your portfolio every year. Even if your home appreciates at 10% per year, you have to live somewhere.
Naturally, WR is complicated by pensions, annuities, SS, etc..

Also, while he himself invests in plenty of real estate, he suggests his listeners invest 100% in equities (0% bonds). But, to be fair, he also wants his listeners to have a fully paid for home, so there is some diversity in that. And, for many of his listeners, home value is a large percent of net worth, so maybe they are approaching a 60/40 ratio when their home is paid for. I don't know.

I have also seen a drop in consistency of message. Again, my opinion, but some of the new personalities don't always give out advice that is 100% spot on with the relatively simple Ramsey formula and I have only very rarely heard of any correction to earlier advice.

I don’t get this. If DR is including home equity to calculate a withdrawal rate (and I doubt that he is) the withdrawal rate would decrease compared to a withdrawal rate on a portfolio of investible assets. Is it reasonable to expect 10-12% appreciation on a residence? I don’t think so.

 

[ERD50]

... ANY credible financial advisor (from a major firm) can create a high quality INCOME portfolio yielding 7-8%. You can also dial up risk and Ean 11+% with well-run closed end fixed income funds. ...

How can anyone struggle with the famous 4% withdrawal rate. Treasurys beyond 10yrs yiels 4.25% to 4.75%. Solid corporates 6-7%. Lots of fixed income CEFs yield 8%-15%. ANYONE can create a portfolio they can withdraw 4% from AND reinvest an excess without selling any holdings......?
Regards, Dick

@dickoncapecod - I think maybe we are missing some context here. Help fill that in, if you will. This is an early retirement forum, so planning for 30 and 40+ year retirements is common. As @pb4uski is mentioning, inflation plays a large factor over those time frames. The 4% SWR includes an inflation adjustment each year. An avg 3% inflation rate for 40 years means an initial portfolio w/d would need to be over 3x the starting point.

I know the 'income investors' here are focused on yields, but they must be expecting the underlying assets to be growing at ~ inflation rates in order for that initial 7-8% that was mentioned, to keep up with inflation. Because, if they dropped in half (as an example) over that time, the yields would then need to be ~ 16% to deliver that initial amount. I don't think 16% can found with an acceptable risk profile. They need to (on average) grow by inflation and maintain that % yield to deliver an inflation adjusted spend amount over time.

This leads to your 8% investments outperforming a 70/30 index investment by ~ 2x. That's a phenomenal difference. Again, if this is so easy, there should be many funds/ETFs out there routinely outperforming a 70/30 blend by 2x. I'm not aware of this. What's missing?

 

[dickoncapecod]

I'm a Ramsey fan and I enjoy the show. For the most part, I agree with his advice. Helping people get out of debt and get control of their finances is a good thing. In my opinion, the advice gets a bit out of his depth when he starts talking WR because he looks at WR based on NW, not invested assets/portfolio value. So, home value, which is a large percentage of folks NW in many cases, is included in the WR calculation. I don't think a WR is sustainable if you take 4% of your home value plus 4% of your portfolio every year. Even if your home appreciates at 10% per year, you have to live somewhere.
Naturally, WR is complicated by pensions, annuities, SS, etc..

Also, while he himself invests in plenty of real estate, he suggests his listeners invest 100% in equities (0% bonds). But, to be fair, he also wants his listeners to have a fully paid for home, so there is some diversity in that. And, for many of his listeners, home value is a large percent of net worth, so maybe they are approaching a 60/40 ratio when their home is paid for. I don't know.

I have also seen a drop in consistency of message. Again, my opinion, but some of the new personalities don't always give out advice that is 100% spot on with the relatively simple Ramsey formula and I have only very rarely heard of any correction to earlier advice.

IMO "no correction to earlier advice" is a glaring red flag.
Regards, Dick

 

[dickoncapecod]

@dickoncapecod - I think maybe we are missing some context here. Help fill that in, if you will. This is an early retirement forum, so planning for 30 and 40+ year retirements is common. As @pb4uski is mentioning, inflation plays a large factor over those time frames. The 4% SWR includes an inflation adjustment each year. An avg 3% inflation rate for 40 years means an initial portfolio w/d would need to be over 3x the starting point.

I know the 'income investors' here are focused on yields, but they must be expecting the underlying assets to be growing at ~ inflation rates in order for that initial 7-8% that was mentioned, to keep up with inflation. Because, if they dropped in half (as an example) over that time, the yields would then need to be ~ 16% to deliver that initial amount. I don't think 16% can found with an acceptable risk profile. They need to (on average) grow by inflation and maintain that % yield to deliver an inflation adjusted spend amount over time.

This leads to your 8% investments outperforming a 70/30 index investment by ~ 2x. That's a phenomenal difference. Again, if this is so easy, there should be many funds/ETFs out there routinely outperforming a 70/30 blend by 2x. I'm not aware of this. What's missing?

Hi. Good post. I'm not equipped to argue with your illustrative example, but I'll just highlight some observations about ALL these (usually at first) "can I make it?" computations.....they all have to do with holding some variable parameters static.

Suppose you started with $1mm 3 years ago. You plan to take 4% = $40k at the end of year 3. If 40% fixed income was flat price you earned $60k on your inv grade corporates. So before you take the $40k at (say) year end, thanks to your initial $600k DOUBLING, your portfolio is now WORTH roughly $1mm + $60k + $600k = very roughly $1,660,000. Great! You take $40k and your go-forward principal is still $1,620,000. Now....time to figure out next year. 4% is now $64,800....do you give yourself a raise? Why? 3 years of Inflation reduced the buying power of your 4% take by 10%......so if 40k was enough, do you need / want to take all the inflation adjusted 58,320 Note: if yes, you are not withdrawing the inflation adjusted 44k you planned for year 4...?? You are NOT withdrawing 4% + 3% + 3% +3% of anything (that's what some lazy thinkers assume). Your inflation adjustment is what? 4% increased by 10% = 4.4%. Now you rebalance!! Your bond allocation is now 648k and at 5% now throws off 32,400 per year. You get it.

Only point: holding selected parameters flat while forgetting to increase them rationally for time breeds unnecessary fear for near-retirees.
Regards, Dick

 

[NW-Bound]

Just who do the Jones keep up with LOL

The Jones do not keep up with anyone. They are the leaders. The big Kahuna. The Honcho. The Poo-Bah. They are in front. Before them, nobody.

 

[COcheesehead]

Just who do the Jones keep up with LOL

They set the pace. The ultimate blow the dough folks.

 

[NW-Bound]

Speaking of the S&P returning 10+%/year, sure, that's the average. Lemme see what happened 25 years ago.

April 2000, S&P high was 1500+. Nine years later, in March 2009, S&P is lower than 750. That's why they call it "The Lost Decade".

One has to ask himself, "Do I feel lucky?" Hmmm... Perhaps this belongs in the concurrent thread about "Lucky/Unlucky".

 

[Original Wally]

I have always pondered... what about those folks ... Late summer 1929. "Honey, I think after the first of the year (1930) - you know new decade and all ... we should sell ALL of our stocks, pay the gains and retire to Florida." Oops.

 

[Sue J]

I often listen to the show. I enjoy the calls and the conversations about money. Here on this forum and financial podcasts are the only places I have for conversations about money. DH avoids money talks, even good news ones and I get a lot out of other people's perspectives.

Where Dave Ramsey has made an impact is in showing how dangerous debt is to many people. The widespread acceptance of car payments, living off credit cards and especially student loans is how many people get into trouble with money. Just the idea of living within your income is alien to too many people.

His advice to show people how to get debt free and WHY is his best contribution. His next best advice is the 3-6 month emergency fund.

Beyond that, his investing advice is very one note. But at least he encourages people to get to the point to do the investing!

And I do think he is correct about the idea of Financial Peace.

As a person who is free of a religion, I have a very strong filter for his religious stuff. But what I have gotten out of his religious stuff is that I'm trying to be more generous. That's a good thing.

 

[dickoncapecod]

Hi. Good post. I'm not equipped to argue with your illustrative example, but I'll just highlight some observations about ALL these (usually at first) "can I make it?" computations.....they all have to do with holding some variable parameters static.

Suppose you started with $1mm 3 years ago. You plan to take 4% = $40k at the end of year 3. If 40% fixed income was flat price you earned $60k on your inv grade corporates. So before you take the $40k at (say) year end, thanks to your initial $600k DOUBLING, your portfolio is now WORTH roughly $1mm + $60k + $600k = very roughly $1,660,000. Great! You take $40k and your go-forward principal is still $1,620,000. Now....time to figure out next year. 4% is now $64,800....do you give yourself a raise? Why? 3 years of Inflation reduced the buying power of your 4% take by 10%......so if 40k was enough, do you need / want to take all the inflation adjusted 58,320 Note: if yes, you are not withdrawing the inflation adjusted 44k you planned for year 4...?? You are NOT withdrawing 4% + 3% + 3% +3% of anything (that's what some lazy thinkers assume). Your inflation adjustment is what? 4% increased by 10% = 4.4%. Now you rebalance!! Your bond allocation is now 648k and at 5% now throws off 32,400 per year. You get it.

Only point: holding selected parameters flat while forgetting to increase them rationally for time passage effects breeds unnecessary fear in pre-retirees.

 

[ERD50]

Hi. Good post. I'm not equipped to argue with your illustrative example, but I'll just highlight some observations about ALL these (usually at first) "can I make it?" computations.....they all have to do with holding some variable parameters static.

Suppose you started with $1mm 3 years ago. You plan to take 4% = $40k at the end of year 3. If 40% fixed income was flat price you earned $60k on your inv grade corporates. So before you take the $40k at (say) year end, thanks to your initial $600k DOUBLING, your portfolio is now WORTH roughly $1mm + $60k + $600k = very roughly $1,660,000. Great! You take $40k and your go-forward principal is still $1,620,000. Now....time to figure out next year. 4% is now $64,800....do you give yourself a raise? Why? 3 years of Inflation reduced the buying power of your 4% take by 10%......so if 40k was enough, do you need / want to take all the inflation adjusted 58,320 Note: if yes, you are not withdrawing the inflation adjusted 44k you planned for year 4...?? You are NOT withdrawing 4% + 3% + 3% +3% of anything (that's what some lazy thinkers assume). Your inflation adjustment is what? 4% increased by 10% = 4.4%. Now you rebalance!! Your bond allocation is now 648k and at 5% now throws off 32,400 per year. You get it.

Only point: holding selected parameters flat while forgetting to increase them rationally for time breeds unnecessary fear for near-retirees.
Regards, Dick

Thanks for the reply, but I'm confused by your example. First, I assume(?) you are demonstrating how an 'income' portfolio works, not applying these numbers to the "4% Total return" approach? I'm confused here because:

If 40% fixed income was flat price you earned $60k on your inv grade corporates.

I read this as a 60/40 AA. So that means $400K of the $1M is in fixed (or at least that 40% is in inc grade corporates), and you are saying that $400K investment kicks off $60K, which is 15%. Is 15% on investment grade corp bonds achievable (I'm seeing ~ 5.5% currently)? Or do you mean something else?

So before you take the $40k at (say) year end, thanks to your initial $600k DOUBLING,

Where does the assumption of $600K DOUBLING in 3 years come from?

I'll stop there, not much sense in further analysis if I'm already off the mark.

Thanks.