This is doing the social media rounds. Here’s a good analysis:
How Crazy is Dave Ramsey’s 8% Withdrawal Rate Recommendation? - Early Retirement Now
“So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way.”
I drove down I65 last week, past the Ramsey Solutions building. Dave has done well for himself. His get out of debt advice is probably useful to many. His investment advice is quite awful.
If you only have 12 years to live and it’s all cash, you’ll be fine. Even leaving 4% of your money for funeral arrangements.
Are there many people who know they have exactly 12 years to live?
Pete
If the usual guideline has been 4% (and was sometimes lower in the age of very low interest rates) all of this could be changing.
To me you should spend 4% and you would like another 4% return to keep up with inflation. So it might be ok to spend the amount over 8% return in good years. But straight 8% is risky.
Got any actual data to back the claim of lowering the rate in years of very low interest?
First of all - it’s not just a straight 4% - The first year, you take 4% of your portfolio as a dollar amount, and then you adjust the dollar amount by inflation each year. In some of the very low interest rate years, there was deflation, which would have lowered the dollar amount, but depending on the performance of the portfolio, the % of the portfolio could have been more or less than 4% - consistent with the rule not being a straight 4%
Then, the original author of the studies that the 4% rule was based on, William Bengen, said that he was updating the rule to 4.7% Creator Of 4% Rule Says New Withdrawal Target Is 4.7%
AJ
Yes, but if you follow Dave’s advice it would be 100% in front-loaded, high fee growth-stock mutual funds. A bad sequence of returns could derail your 12 year retirement plan 
I do owe Dave a debt of gratitude. I listened to his show once about entrepreneurship, and a caller had the same issue I had at the time - too much work, not enough hours. Dave said you’re working far too cheap. I had an epiphany.
Just so long as the first 4 years of retirement don’t look like 2000 to 2004 or 2007 to 2011 and undoubtedly other periods.
You’re using a different definition of “Withdrawal Rate” than is commonly used. The common usage is that you take (withdraw) X% of your starting balance the first year. Then in the second year, you adjust that amount by inflation and take that new number as a withdrawal. And same for all the years thereafter. For example, if you start with $1,000,000, you withdraw $80,000 the first year. Then if the investing climate is bad, and lets say it goes down by 30%, at the end of the year you have roughly $620,000 remaining. In year 2, you don’t withdraw 8% of that depleted amount, but you withdraw $80,000 * (1 + annual CPI), let’s say $85,000. But what if year 2 has a 20% decline? Then at the end of year 2, you have roughly $411,000 remaining. You should now easily see that it may not (probably will not) last for 12 years in a bad economic environment? That is precisely why, and how, the “safe” withdrawal rate was determined to be around 4%. If you start at 4%, your money will last for 30 years no matter how bad the market environment has been for any 30 year period in recorded history. But if you start at 8%, you will run out of money for many of those 30 year periods (for example beginning withdrawals in 1929 or in 1966).
Even if “all cash”, you will run out. That’s because inflation often (almost always) outruns the returns on cash. For example, you start with $1,000,000. withdraw 8% or $80000. Year 2, you withdraw $85,000, account grew by 25,000, so $940,000 remaining. Year 3, you withdraw $91,000, account grew by $23.5k, you have $872,500 remaining. And so on. You’re surely going to run out of money before 12 years.
If it is all cash then all you have to worry about is inflation. Which doesn’t look all that bad to me.
2000 3.40%
2001 1.60%
2002 2.40%
2003 1.90%
2004 3.30%
2007 4.10%
2008 0.10%
2009 2.70%
2010 1.50%
2011 3.00%
Were you thinking about “the market”?
Am I the only person who realizes this was a (very funny!) joke?
No, but has been discussed on this board many times.
I used the 4% rule to retire but did not dig into it. It seems to me that as long as your portfolio is well above that 4% your net worth increases each year. So 4% of the following year also rises. The tough part is when you have a big drop in net worth. You hope you do well enough to fill the gaps. I retired at 2x4% and now am close to 10x4%. Market dips are no longer a concern. Playing with other people’s money.
Thanks Softie.
I can’t believe how seriously it got discussed…
And the thing I remind myself about is that the cost of living in retirement will go down as time goes on and you quit doing the same things. Your lifestyle diminishes - you don’t travel as far or as often, you don’t update the car, house, clothes as often etc. Medical costs may go up but Medicare has pretty good coverage. Oh, and then you die.
So seriously, withdraw what you need and adapt to living on the remaining amount. Just like you did when you were saving. There’s no prize for leaving the most money. Use it up having as much fun as you can.
Anecdata doesn’t count.
AJ
Here’s a link to the video. Ole Dave angrily doubles down on the stupidity of taking less than an 8% withdrawal for retirement. {{ LOL }}
intercst
Dave Ramsey doesn’t think it’s joke. In the video he’s very angrily defending the 8% withdrawal rate for retirement. {{ LOL }}
intercst
That’s why it 4% and not 8%. And when you do get a 50% stock market decline, people start saying the safe withdrawal rate is 2%. {{ LOL }}
intercst
Morningstar issued a report 2 years ago saying that low interest rates had reduced the “4% rule” to 3.3%.
The 4% Rule Is Dead: New Morningstar Study | ThinkAdvisor
Now Morningstar says that the “4% rule” is back. I don’t think I’d be using Morningstar for retirement advice. {{ LOL }}
The 4% Rule for Retirement Is Back (msn.com)
intercst
So weird. Intercsts original studies and everyone else since have focused on safe withdrawal rate average to make the money last up to 30years based on backtesting of every past 30 year period. DR’s saying stocks return on average 12% a year so take out 7 or 8% safely. That’s pretty weird math - what about the other 29 years out of 30 when they don’t return the average, or '22… or '08…
The safe withdraw rate isn’t the average. It’s the withdrawal rate that allowed you to survive every rolling 30-year period since the Civil War. It’s the maximum you could withdrawal and still survive the worst 30-year period in history.
That’s why the “4% rule” is very likely to leave you wealthy at the end of 30 years. As it turns out, 1994 to 2024 looks like it’s going to be right around the median value of 4 times the starting retirement balance for someone who maintained a 60/40 portrfolio through 30 years of annual withdrawals. If you invested more aggressivly with a larger stock allocation, you likely have double or triple that.
2022 Update: Real-Life Retiree Investment Returns (retireearlyhomepage.com)
intercst
For sure - the idea of 8% Bengen is so absurd, I just skimmed the text.
