After I wrote my Dave Ramsey piece yesterday (Math Suckage and Dave Ramsey), my friend Wade Pfau, a Princeton Ph.D., a CFA, and Professor of Retirement Income in the new Ph.D. program for Financial and Retirement Planning at The American College, wrote a piece on Ramsey and his suggested 8 percent retirement withdrawal rate: Dave Ramsey’s 8% Withdrawal Rate. My post noted that an 8 percent retirement withdrawal rate is “crazy,” but I focused on the 12 percent return assumption. Wade deals with Dave’s withdrawal rate nonsense head-on. He pulls no punches.
Here’s a taste.
When it comes to retirement, Dave Ramsey says you should be 100% stocks and that this will support an 8% inflation-adjusted withdrawal rate. It sounds wonderful. Certainly that allows for a lot more spending than what you would think possible if you’re a regular reader of this blog. But this number comes from a completely ludicrous basis. He opened an Excel spreadsheet, assumed a fixed annual return of 12% [Bernie Madoff might even be jealous of that return sequence], and determined that 8% is a sustainable withdrawal rate with inflation of 4% and that wealth will never be depleted. The problem with this is so basic that it’s hard to believe Dave Ramsey is ignorant about it. It’s the sequence of returns risk. It’s what William Bengen illustrated in the 1990s. The sustainable withdrawal rate can be less than the average portfolio return because people are taking income out of the portfolio, and when the market is down the funds they take out don’t get the chance to rebound on the subsequent recovery.
Wa-bam. Unfortunately (from an accountability standpoint, I don’t wish ill of or on anyone), Ramsey hasn’t been around long enough for enough people to be damaged by his terrible advice to force its correction. Please read the entire article and see why Dave’s well-earned credibility in the areas of debt and savings is so badly compromised by his dangerous and damaging investment and retirement planning advice.
Is it asking too much for people simply to be accountable, to own up to their mistakes and to correct them? Dave? Paging Dave Ramsey….
Sadly, it appears so.