Nashville radio empresario Dave Ramsey has helped millions of people navigate their way out of debt and set a more sustainable financial course. Much of his advice on personal budgeting is sensible and a clear benefit to many of his listeners. His investment advice, on the other hand, is often misguided and potentially hazardous.
Ramsey blew up the internet last month by suggesting that his listeners, regardless of age or other considerations, should invest 100% of their assets in stock mutual funds and begin withdrawing 8% every year adjusted for inflation once they retire. The 8% withdrawal is about double what most responsible advisors and financial planners take as a theoretical starting point before considering the myriad factors unique to each individual situation. Financial professionals pushed back, eliciting a testy retort from the talk show host.
The idea of a “safe” withdrawal rate in retirement traces back to a 1994 paper by financial planner by Bill Bengen in the Journal of Financial Planning examining expected returns from diversified portfolios consisting of 50% stocks and 50% bonds. Bengen and later authors concluded a hypothetical retiree could begin withdrawing about 4% of their portfolio each year adjusted for inflation over 30 years with a low probability of depleting their assets. Bengen also found that a higher allocation to stocks slightly increased the odds of going broke within the 30-year window. Subsequent research produced similar results, suggesting a theoretically safe withdrawal rate between 3% and 5% depending on market valuation over the period as well as investment fees and taxes.
The popular radio host caused an uproar by assuring his listeners they could safely begin retirement with an 8% inflation-adjusted annual withdrawal rate. His rationale is based on a disregard for portfolio risk and overly aggressive asset allocation advice.
Ramsey tells his audience to eschew protective assets like bonds and cash, advocating for a 100% stock portfolio on the simplistic (and false) assumption that stock funds consistently return 12% per year. His recommended allocation is high octane, with the potential for greater returns but above average risk: 25% each into growth and income, growth, aggressive growth and international stocks. Katy, bar the door.