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Dave Ramsey's Retirement Rules/Investment Assumptions


AzCactus
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I am not sure if anyone else follows Dave Ramsey at all or more specifically his retirement rules.  He basically says that one should expect a 12% return from the market and plan for a withdrawal rate of 8%.  I find both of these numbers too high by about 4%.  Am I missing something here or is Ramsey just being a bit aggressive?

 

David

 

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Both numbers are very aggressive IMHO.

 

Personally, I'm concerned even about 4% withdrawal rate. If I could be sure that I'd get 5% after-inflation return and 4% after-inflation withdrawal, I'd retire tomorrow.  8) (This is a bit exaggerated for making a point ;) ).

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I am not sure if anyone else follows Dave Ramsey at all or more specifically his retirement rules.  He basically says that one should expect a 12% return from the market and plan for a withdrawal rate of 8%.  I find both of these numbers too high by about 4%.  Am I missing something here or is Ramsey just being a bit aggressive?

 

David

 

take a look at www.firecalc.com for withdrawal rates that worked over different rolling periods in last 100 years or so.

 

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The best thing about Dave Ramsey is he helps folks get out of debt.

The worst thing is he wants them to use  his commission brokers for investing.

 

 

I can't recall who came up with the 4% withdrawal rate but that, IMO, is rather high for the following reasons:

* As discussed ad nauseum, the frothy state of the equity markets suggests that future returns are likely to lag historic averages due to mean regression if nothing else.

* Inflation is benign right now, but if someone retires now at 65 and lives to 90, it's almost a sure thing that they will see a period or two of inflation, potentially rampant, so that 4% will not buy squat at some point.

* The unknowns are plentiful when projecting out a 25 year retirement with the surprises tending to be negative (health costs, potential illness/injury, previously mentioned inflation).

* If one is going to be wrong in withdrawal rate, it is far better to have estimated more "have" compared to "need" than to have estimated more "need" compared to "have".

 

 

There are several factors which will drive my ultimate retirement time, but one that I am looking at is whether I can live on a 3% withdrawal rate. Right now, I can't. I do think that the 3% provides enough margin of safety for an individual considering retirement.

 

 

-Crip

 

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I can't recall who came up with the 4% withdrawal rate but that, IMO, is rather high for the following reasons:

* As discussed ad nauseum, the frothy state of the equity markets suggests that future returns are likely to lag historic averages due to mean regression if nothing else.

* Inflation is benign right now, but if someone retires now at 65 and lives to 90, it's almost a sure thing that they will see a period or two of inflation, potentially rampant, so that 4% will not buy squat at some point.

* The unknowns are plentiful when projecting out a 25 year retirement with the surprises tending to be negative (health costs, potential illness/injury, previously mentioned inflation).

* If one is going to be wrong in withdrawal rate, it is far better to have estimated more "have" compared to "need" than to have estimated more "need" compared to "have".

 

 

There are several factors which will drive my ultimate retirement time, but one that I am looking at is whether I can live on a 3% withdrawal rate. Right now, I can't. I do think that the 3% provides enough margin of safety for an individual considering retirement.

 

 

-Crip

 

If you run firecalc, it does modeling that includes worst bubbles of the past.

 

With that said, you can get ~100% solvency for 40 years at 3% withdrawal.

 

If you go with 4%, you get 95% chance to survive for 30 years. If you really believe we are in a bubble, you can adjust that 95% chance downwards.

 

I'd also feel much more safe if I had portfolio/spending that matched 3% withdrawal.

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I can't recall who came up with the 4% withdrawal rate but that, IMO, is rather high for the following reasons:

 

The Trinity Study is the most referenced source (but not the original source iirc) http://en.wikipedia.org/wiki/Trinity_study

Update: http://www.bogleheads.org/wiki/Trinity_study_update

 

* Inflation is benign right now, but if someone retires now at 65 and lives to 90, it's almost a sure thing that they will see a period or two of inflation, potentially rampant, so that 4% will not buy squat at some point.

 

The 4% is based off your starting balance and then adjusted for inflation. 

 

* The unknowns are plentiful when projecting out a 25 year retirement with the surprises tending to be negative (health costs, potential illness/injury, previously mentioned inflation).

 

Contingency savings can be budgeted in.  Insurance coverage can be budgeted in.

 

 

* If one is going to be wrong in withdrawal rate, it is far better to have estimated more "have" compared to "need" than to have estimated more "need" compared to "have".

 

There are several factors which will drive my ultimate retirement time, but one that I am looking at is whether I can live on a 3% withdrawal rate. Right now, I can't. I do think that the 3% provides enough margin of safety for an individual considering retirement.

 

It's fluid though as well.  There is plenty of time to make adjustments as necessary if the situation warrants.

 

If you want $75,000 per year in retirement:

 

3% - $2,500,000.00 - 97% success rate

4% - $1,875,000.00 - 87% success rate

 

$625,000.00 is a lot more to save.  33.33% more savings for 10.00% more chance of success. Which doesn't account for your ability to add income or reduce expenses over the years.

 

 

 

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If you want $75,000 per year in retirement:

 

3% - $2,500,000.00 - 97% success rate

4% - $1,875,000.00 - 87% success rate

 

$625,000.00 is a lot more to save.  33.33% more savings for 10.00% more chance of success. Which doesn't account for your ability to add income or reduce expenses over the years.

 

 

The $625K more could also be shown as 4 years of delay in retirement assuming not saving any money and returning 8% on the nest egg or 6 more years by returning 10% on the nest egg. Again, plenty of factors come into this but 3 years of work may be worth it for the piece of mind.

 

 

-Crip

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The best thing about Dave Ramsey is he helps folks get out of debt.

The worst thing is he wants them to use  his commission brokers for investing.

 

Totally agreed on this point.  Another thing that always struck me as strange, is that he entirely advocates a "growth-stock" mutual fund, whereas his approach is all about being a cheap-skate.  I'd think a value approach would benefit more, financially and philosophically.

 

- vertek

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I have a question.  When calculating the SWR, does the equity in one's primary residence get included?

 

Yes, if you plan to downsize, and you are fairly certain as to how much equity you can release.

 

Otherwise no.

 

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I think it's OK to attach this article from the Financial Analysts Journal.  Using an annuity approach is a good way to reverse engineer the rate of return that's needed to make the annuity work (assets, spending, and life expectancy).  Obviously, there are a number of caveats, but this paper suggests revisiting the calculation each year to make adjustments.  Lots of paths up the mountain....

faj.v71.n1.2.pdf

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