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3471Dave Ramsey is a household name when it comes to personal finance. Millions have tuned in to his radio show or read his books to learn how to get out of debt and build wealth.
But some financial experts say that while Ramsey deserves credit for motivating people to live within their means, not all of his advice holds up, especially when it comes to retirement planning.
“Give the man credit where credit is due,” said Jeanne Sutton, a certified financial planner, in a video on the Financial Fast Lane YouTube channel, which is hosted by investment advisor representative Lane Martinsen.
She said, “He has done a tremendous job of coaching thousands of people to better money management.”
“Unfortunately, as a celebrity with a large platform, Dave is in the unenviable position of providing simplified financial advice on complex topics to a broad audience. Certified financial planners know that doing this accurately is nearly impossible, and sometimes he gets it very wrong, which is exactly what happened earlier this month and why your financial advisor is upset.”
Lane Martinsen also warned that some of Ramsey’s guidance is “simply wrong and even financially dangerous.”
The 8% Withdrawal Debate
The main issue centers around what Ramsey says is a “safe withdrawal rate” during retirement.
He believes retirees can pull 8% of their investment portfolio each year if their average return is around 12%.
“If you’re making 12 [percent] in good mutual funds and the S&P is averaging 11.8, and if inflation for the last 80 years is 4%, if you make 12 and you need to leave 4% in there for average inflation raises, that leaves you eight. So, I’m perfectly comfortable drawing eight,” Ramsey said in his podcast.
But according to retirement researchers and financial planners, Ramsey’s math is overly simplistic and ignores key risks.
A trio of experts, David Blanchett, Michael Finke, and Wade Pfau, called it out in an article, noting that Ramsey fails to distinguish between arithmetic and geometric returns. That difference matters.
“An investor can’t spend arithmetic returns. They are subject to the tyranny of lower geometric returns,” the article states.
The more volatile the portfolio, the bigger the gap between the two, and the more likely a retiree is to run out of money.
Real-World Consequences
If someone followed Ramsey’s 8% rule with a $1 million stock-heavy portfolio starting in 2000, they would have run out of money by 2013.
Even though the average return was about 8.3% over those years, early losses in the 2000s would have done too much damage, a scenario known as “sequence of return risk.”
By contrast, the standard rule of thumb in the financial planning world is a 4% withdrawal rate.
And some experts now argue that even that number may be too optimistic, depending on fees and market conditions.
“Thousands of people are now under the assumption they should be invested in the most risky, volatile investment strategy there is and should accept nothing less than a 12% annual return,” Sutton said.
“That’s dangerous.”
False Hope vs. Harsh Reality
Ramsey argues that telling people to withdraw only 4% robs them of hope.
“You put that out into the dadgum community, and then people go, ‘I don’t have enough money. It’s hopeless. I’ll never be able to save enough to retire,'” Ramsay said.
“A million dollars should be able to create an $80,000 income for you, boys and girls, perpetually! Forever!”
But experts say optimism can be harmful when it doesn’t reflect reality.
“While Ramsey’s advice might be less depressing, it is also dangerous,” Blanchett, Finke, and Pfau wrote.
“No retiree should believe that they can maintain an $80,000 lifestyle after saving $1 million.”
Instead, they suggest a more flexible approach: start with a higher withdrawal rate only if you’re prepared to reduce spending when markets perform poorly.
A Mixed Legacy
Even critics admit Ramsey has done a lot of good.
“I like Dave Ramsey. I would consider myself a fan,” Martinsen said.
“He’s done a lot of good in the world in helping people to get out of debt and to be responsible with their finances.”
But that doesn’t make all of his advice bulletproof. As the experts put it, higher investment risk requires more spending flexibility.
Retirees who follow overly optimistic guidance without preparing for market downturns may face an unpleasant surprise.
Advisers say promoting the idea that people can ignore harsh financial realities goes against the more careful, disciplined advice Ramsey gives about managing debt.
Change may be painful, but as Ramsey himself often says, “change is painful.”
In this case, critics hope that Ramsey will reconsider the advice he gives about retirement investing, not because they’re trying to steal hope, but because they want people to succeed in the long run.
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