First, a disclaimer. There are fans of the entertainer, Dave Ramsey who follow his every word, and are especially vocal about his views regarding credit. Their premise is that credit, its very existence, is dangerous, and even one who has extra cash each month and simply uses a card for convenience is on a risky path.
As far as investing for retirement is concerned, it's His advice that's dangerous, and far riskier than any view I may hold regarding credit card use. This quote is still active on His web site.
How Can You Make Sure Your Retirement Funds Last?
As long as you
didn’t take the ready-fire-aim approach to retirement planning, you
should already know how to make retirement last. But, here’s a
You’re going to keep your nest egg invested and averaging 12% growth.
We’re estimating inflation at 4%. So, to maintain your nest egg and
break even with inflation, you will live on 8% income from your nest
egg. That means if you have a nest egg of $625,000, you will live on
$50,000 per year: $625,000 x 8% (.08) = $50,000.
Some fraction of the population retire each year, and it's safe to say that of the 160M households in the US, a few million retired at the end of 1999. How would they have fared under Dave's advice?
I pulled the S&P total return data for the years from 1990 or so.
Data is freely available from multiple sources. I start with $1M as
it's a round number, and easy to see as it's a typical goal,
especially when assuming the 4% rule. Now, for 2000, I first withdraw
the full 80000, or 8% as Dave suggests, then apply the year's
gain/loss to enter the year end balance. For each year following, I
inflate the starting withdrawal, the $80K, by only 2%.
For further analysis, I simply put the starting $1M/$80K after a
different year, to show how he's produced 12 solid years of failed
As he suggests, we take out 8% each year, and are full into stocks, no stock/bond mix, because that would surely lower the return given the near zero rates on bonds. He also assumes 4% inflation. I kindly lowered the multiplier to 2% since inflation has been running lower than 4. How did his retirees do in that decade? They spent through every cent by the end of the 10th year. It's little comfort that the decade before (or after) performed so much better that the average got pulled back up. (i.e. 1991-2010 CAGR was 9.17%, and 2000-17, 5.37%, at least a positive number).
The 1990's decade was pretty strong, but even retiring in 1995 would have left you with a balance of $480K and inflated withdrawals this year of $124K, so just a few years to zero.
And continuing to analyze via spreadsheet, a 2007 retiree would be down to a 2017 year end balance of $433K. A 12% return thru 2023 and he'd still see zero by that date.
In the end, it's not me trying to game the system, discovering one bad year. Every retiree who followed The David's advice from 1995-2007 would have seen their money run out far too quickly. Unless he had the good fortune to die first.
As far as the 4% rule goes, a 2000 retiree, using the same assumptions as I did for the 8%, would run out of money after 31 years. Keep in mind, the recommended stock/bond mix from the Trinity study would have fared better in the lost decade than 100% stock, I am just trying to keep this apples to apples.
4% is still the general rule I'd recommend. It was the number I used to make my own retirement decision. In our case, there are 2 safety nets. Social security that will kick in for my wife and me, in 8 and 15 years, which is forecast to cover half our current expenses. And a potential downsize, which would reduce our expenses 25%, and provide cash, the difference in home prices. I share this extra detail to make a point. You shouldn't just look at one number when making these long term decisions. One's "Number" needs to be looked at far closer when it's used for early retirement vs a post 60 retirement. A 70 year old retiree doesn't have too worry too much about whether the money actually lasts beyond 30 years.
Last - I continue to be amazed at how vocal the David's anti-credit follows are, while the choice to use credit is quite personal, and based on behavior, yet they remain silent on his entire retirement thesis, which, at best, failed for over a decade's worth of his followers.