The 4% rule is a well-known guideline for retirement withdrawals. It states that retirees can safely withdraw 4% of their nest egg each year in retirement. However, popular finance personality Dave Ramsey thinks this rule is overly conservative. He believes withdrawal rates of 6% are a better starting point upwards of 10% are reasonable for many retirees.
The 4% rule suggests limiting annual retirement spending to 4% of total portfolio savings to avoid outliving your money. Dave Ramsey believes this rule is overly restrictive in cases with large seven-figure portfolios for people in their 70s or later. He has stated that much higher withdrawal rates could be perfectly comfortable and sustainable for many retirees under the right conditions. In a recent YouTube video, Dave Ramsey went so far as to call the 4% rule “asinine” and “ridiculous.”
In this article, we’ll explore Ramsey’s critique of the 4% rule and his justification for much higher withdrawal rates for some retirees. We’ll also discuss the importance of flexibility and sequence of returns risk versus rigidly adhering to a fixed percentage. While the 4% benchmark can be a helpful starting point, Ramsey advocates for adapting withdrawal rates periodically based on market performance and individual circumstances in retirement. According to him, those who unthinkingly follow the 4% rule without regard for their situation are like “financial planning lemmings.”
The 4% Rule is Overly Conservative, According to Ramsey
In a recent video, Ramsey blasted proponents of the 4% rule and said that he is “perfectly comfortable” with retirees taking out between 5%-10% per year, not just 4%. Based on their personal circumstance and whether they are invested in good growth stock mutual funds so they get double-digit returns annually on average.
Ramsey’s main argument against the 4% rule is based on fear and an overly rigid belief that sticking to 4% is the only way to preserve retirement savings. Ramsey provides an example of a 72-year-old listener with $1 million in retirement savings. The man’s financial advisor cautions him to limit withdrawals to 4%, but he wants to take 5% to fund some travel. Ramsey calls the advisor’s guidance just the standard advice and encourages the retiree to take 6% annual distributions.
Financial Advisors Use it Out of Fear and Herd Mentality
Ramsey believes most financial planners and advisors stick to the 4% rule out of fear because it is an industry standard. He refers to this as “financial planning lemming” behavior. Lemmings are small rodents that follow each other blindly, even over cliffs. Ramsey feels advisors fail to apply logic and math to each individual circumstance and merely mimic the rest of the industry’s overly simplified conservative advice.
Ramsey Recommends 5-6% Withdrawal Rate
For the 72-year-old listener, Ramsey endorses bumping his withdrawal rate up to 5-6%. He states that taking out even 10% would likely not “destroy the portfolio,” given the man’s age and assets. Ramsey argues that at 70+ years old, the man may not potentially have a 25+ year time horizon to outlive savings.
Even 10% Would Not “Destroy the Portfolio”
Ramsey routinely emphasizes flexibility in retirement planning, pushing back on rigid rules like the 4% guideline. He maintains that even withdrawing 10% annually would not demolish a prudent portfolio quickly enough to ruin a retiree’s finances. Assuming reasonable market returns, Ramsey believes most retirees have more cushion than ultra-conservative planners admit.
Sequence Risk Matters More Than a Fixed Percentage
Another perspective to consider, contrary to Dave Ramsey, is rather than getting fixated on a particular withdrawal percentage, retirees should focus more on the sequence of returns risk. This is the risk of experiencing poor market returns and high inflation early in retirement—Over time, this unfortunate sequence of events undermines the portfolio’s sustainability.
Even though Ramsey banks on an average historical stock market return of between 11% – 12%, that statistic can be deceiving. Even if long-term average returns are solid, poor returns at the outset of retirement can doom a portfolio’s longevity. Being flexible and responding to market conditions is wiser than sticking to a fixed percentage.
Order of Returns Impacts Outcomes More Than Average Returns
If we really look at the math and logic, the order and timing of investment returns matter more than long-term averages. Even if markets average 11%-12% over 30 years, going through a significant bear market in the first five years could cripple a retirement plan beyond repair. Being adaptive is vital. Ramsey doesn’t consider the dangers of long-term secular bear markets in the destruction of investment capital.
Flexibility and Reasonable Spending Are Key
Rather than focusing on inflexible rules, Ramsey believes retirees should develop reasonable budgets that allow for some cushion and discretionary spending. As long as withdrawals remain sensible for available assets, Ramsey sees no reason to restrict spending to ultra-low fixed rates like 4 or 5%.
Rigid Rules Not Necessary with Sufficient Assets
Ramsey argues that rigid withdrawal rate rules are unnecessary for retirees with ample savings and moderate spending needs. Even 10% withdrawal levels may pose little danger if assets are substantial and markets cooperate. The key is remaining flexible and adaptive as conditions dictate.
Consider Taxes and Account Types
In addition to flexibility on spending percentages, Ramsey advocates strategic use of different retirement account types. He usually recommends drawing first from taxable accounts to preserve tax-advantaged funds. For example, with a traditional IRA, required minimum distributions must start at age 70.5. It’s better to pull from a Roth IRA later if possible.
Prioritizing withdrawals from taxable accounts first is generally wise. This allows more money to keep growing tax-deferred or tax-free within things like 401ks, IRAs, etc. Withdrawal requirements also impact order – for instance, pulling traditional IRA money before tapping Roth assets.
Have a Plan, But Stay Flexible
While mainstream retirement withdrawal advice is focused on maintaining reasonable spending and adapting, while guidelines like the 4% rule or modeling tools can provide a helpful starting point, nothing substitutes for staying engaged, informed, and flexible as real-world conditions unfold.
Reevaluate Withdrawal Rate Periodically as Needed
Retirees should develop a thoughtful retirement plan with estimated spending needs and withdrawal rates. However, revisiting these estimates periodically and adjusting where prudent is essential. Cutting spending and withdrawals during significant market downturns can help preserve portfolio longevity.
- The 4% withdrawal rule is overly cautious, according to Dave Ramsey
- Financial advisors stick to it due to fear and peer pressure
- Ramsey thinks 5-6% withdrawals are more reasonable
- Even 10% could work for some retirees without destroying savings
- The sequence of returns matters more than averages
- Early retirement losses compound over time
- Flexibility and adapting are crucial when withdrawing funds
- Rigid rules aren’t always necessary with ample savings
- Consider taxes – use taxable accounts first
- Preserve tax-advantaged space like IRAs if possible
- Have a plan, but review and adjust as needed over time
Dave Ramsey pushes back against the prevalent 4% withdrawal rule for retirees. He believes it is born out of excessive fear among financial advisors who act like lemmings following the crowd. Ramsey argues for more flexibility, claiming that up to 10% withdrawal rates could be sustainable for some older retirees with adequate savings and reasonable spending. The key is focusing more on the sequence of returns risk, preserving tax-advantaged accounts when possible, and periodically reviewing and adjusting withdrawal rates as market conditions dictate. While 4% can be a worthwhile starting benchmark, retaining flexibility is vital for a successful retirement plan.
Dave Ramsey argues the 4% rule is too rigid and conservative for many retirees. With sensible spending and sufficient assets, 6-10% withdrawal rates may be perfectly comfortable without quickly demolishing a retirement nest egg. Remaining flexible and adjusting along the way is generally the wisest approach.