Radio show host and financial guru Dave Ramsey doesn’t seem to shy away from taking a contrarian view of personal finance. So he was probably not surprised by the pushback he received for proposing an 8% retirement rule rather than the more conventional 4% rule.
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As noted by Morningstar, Ramsey recommended retirees invest all their assets in stocks and then withdraw 8% per year of the portfolio’s starting value, with annual expenses adjusted for inflation. For example, if you have a starting portfolio of $500,000, you will withdraw $40,000 in the first year. If inflation is 3%, you will withdraw $41,200 in year two, $42,436 in year three, and so on.
The idea is that the typical stock market return of around 10-11% per year will cover your 8% and inflation. This is very different from the 4% rule, which recommends spending no more than 4% of your investments in the first year of retirement, then adjusting the total each subsequent year to account for inflation .
Like any financial rule, the 4% rule and the 8% rule do not apply to everyone. This largely depends on your financial situation. In the case of Ramsey’s 8% rule, the assumption is that you have accumulated a large enough nest egg that you can withdraw at least 8% per year for many years.
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Americans May Not Be Able to Afford Ramsey Retirement Rule
The problem is that most Americans don’t retire with a large nest egg. A 2023 analysis from Synchrony Bank looked at different estimates of retirement savings and found the following data:
None of these savings numbers will allow you to spend a lot of money under the 8% rule. If you have $232,710 in your portfolio, then you’ll have to get by with $18,616.80 your first year of retirement, plus any Social Security income you have. The average Social Security retirement payment is $1,866.44 per month as of April 2024, according to the Social Security Administration.
If your savings are $164,000, then the 8% rule gives you $13,120 to spend your first year of retirement (in addition to Social Security).
An 8% retirement rule may be possible (if you retire later)
Even if you have a sizable nest egg, Morningstar found that the 8% rule probably works best if you retire later in life, such as at age 70, which shortens your retirement life expectancy .
According to Forbes, you can realistically retire with an 8% withdrawal rate, provided you choose a good closed-end fund (CEF) with a “stable 8% return.” The trick is to get that stable return (with a high opening balance). But you also have to consider that your portfolio will collapse some years.
“Volatility has two effects on the safety of withdrawal rates,” ThinkAdvisor noted in a blog post. “First, it means that retirement portfolios can lose value. When retirees withdraw a fixed amount from an investment portfolio that has fallen in value, it reduces an already battered nest egg. The wallet is now smaller. Less savings means less money whose value can increase when yields rise.
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This article originally appeared on GOBankingRates.com: Can You Realistically Follow Dave Ramsey’s 8% Retirement Rule?
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