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Oh, you are referring to my comment to whoisjohngalt! My bad. OK, yes, I see what you are saying. You are right, they stayed at 80k but should have decreased. Let's change it. Shall be base our withdrawal on the end of the year balance?
Oh, and look at this! 8% of 500k is not 80k at all.
DR recommends 100% stocks. That is a volatile portfolio. Some will be in the unfortunate position of experiencing steep market declines early in retirement. Suppose the market plunges the first year and your 500k goes to 400k. That is only a 20% decline, and can easily happen. You withdraw 32k and are left with 368k. The next year is another down year, you lose 10%. You withdraw your 26.5k. You're down to 304.7k in only two years.
And how did you get from that to 200k balance 10 years from your 500k starting point? You made it up
Yes, absolutely I did. Some people will do much better than that. Absolutely. We know that some people will not run out of money with this strategy. They will be the minority, but they will do fine nonetheless.
Edit: I choose not to follow a strategy that will fail more than it will succeed. I cannot afford to fail. I continue to think it is nearly criminal to put forward a strategy which will fail so often and present it as a sound and prudent thing to do.
If 8% out of the question your retirement assets just aren't enough to support it. I linked an article from Dave that said in down times you may have to adjust. Just because you have a down year though doesn't mean you have to cut to match the down turn or contribute to offset it because in truth you can erode princ over time. There isn't much point in me retiring with 1mm or 10mm and dying only to leave that or more to someone else who isn't my wife. You response to this still comes from your intitial response to scenario "a" where by you assumed continual decline in the market, princ erosion and smaller and smaller withdrawals to get your asset balance to 200k in 10 years
But I do expect continual decline. I am withdrawing more than long-term CAGR + investing costs. The only way I will not experience continual decline is if I am fortunate enough to have been retired during better than normal stock market performance. That will happen for some. Others will experience normal stock market performance or even less than normal stock market performance.
I agree that it is OK to erode some principal over time. I do not think it is prudent to erode it so quickly that the likely outcome is failure.
But I do expect continual decline. I am withdrawing more than long-term CAGR + investing costs. The only way I will not experience continual decline is if I am fortunate enough to have been retired during better than normal stock market performance. That will happen for some. Others will experience normal stock market performance or even less than normal stock market performance.
I agree that it is OK to erode some principal over time. I do not think it is prudent to erode it so quickly that the likely outcome is failure.
The pick a realistic cagr and set your withdrawl rate lower than that
The pick a realistic cagr and set your withdrawl rate lower than that
I hear 4% isn't bad with a portfolio that's about 70/30 stocks to bonds. Or something like that. I mean, I might have read that somewhere, somehow. And then somebody might have said something about how 4% isn't really good because stuff in the future might be lower on average or go up and down a lot more than it has in the past, but numbers hurt my head.
Being serious, I do think it's safe to say that Dave Ramsey's target demographic isn't exactly ready for a discussion of Safe Withdrawal Rate and Efficient Frontiers and standard deviations of returns and all that. Which means his retirement advice (if he's really suggesting an 8% initial withdrawal) is pretty darn bad. But then you agree with that.
If it means a, the outcome is still that your withdrawals become substantially smaller each year. If I start out with 500k withdrawing 40k annually, and 10 years later I am down to 200k withdrawing 16k, can that be considered a successful withdrawal strategy? I'm not out of money, but it sure doesn't look like a successful strategy to me.
And if it means b, The Trinity Study says such a strategy will fail more than half the time in 20 years or less. If the retirement goes longer, the failure rate increases.
Where is the academic study of withdrawal rates supporting DR's numbers? There isn't one. There is no math behind his strategy at all.
But how likely is that sort of sustained market downturn? Assuming the money is in tax-advantaged retirement accounts, it will be expected to grow by 8% a year above inflation (10.5% for 2.5% inflation, 11% for 3% inflation, or 12% for 4% inflation).
In which case the type of sustained income hit you envision is quite unlikely on meaning (a), unless you retire at the peak of a market bubble (which should be avoided of course).
His assumptions are flawed. The long-term arithmetic mean of the US stock market is a bit under 11%. However, that is meaningless. The number which matters is Compound Annual Growth Rate (CAGR). The long-term CAGR of the US market is a bit under 9%.
And what about investment expenses? They are not accounted for at all in long-term CAGR. An investor receives net returns, not gross. DR recommends expensive load funds, so the investor loses another 1% or so to fees.
That means we can expect a return of less than 8% before withdrawals. An 8% withdrawal rate is simply not sustainable.
I don't think Ramsey promotes 100% large-cap stocks or S&P 500. Of course if you assume S&P 500 then I'd agree 8% is too high. But throw some small and mid cap and international stocks in there...
Never make financial decisions in a vacuum. So much of your life is interconnected and a decision impacts much. In the case of the caller, he has twice as much savings as his mortgage balance. So paying off the mortgage is not putting all his eggs in one basket. We also don't know his age which would factor in the decision as well, if pulling money from a retirement plan. In today's economy keeping a good deal of liquidity is important, as is paying off debt. The only sure rate of return is paying off debt...investing in the market etc. has no guaranteed return. Age, marital status, retirement plans, rate of interest on the loan, health condition...all of these factors need to be considered. While I agree that paying off debt is best option in general, these other factors need to be considered as well rather than just a blanket answer of sure, pay it off. Ancient wisdom says "just as the rich over the poor, so the borrower is to the lender." Debt is slavery.
Oh yes. I caught his segment wherein he invited Brian Stoffel of The Motley Fool on to his show. He belittled Stoffel's credentials and stated that he has helped more people than anyone. As if either of those things have anything to do with math.
He actually did this? Then IMHO he's not just another media finance personality, he's an a$$hat. I'm not a huge of The Motley Fool, but saying "I've helped more people than anyone, therefore ignore math" is effing stupid and rude. Also, forgetting about the math, even saying his opinion should carry more weight is stupid because it's like saying "McDonald's has sold more meals than any other restaurant, therefore their food is the best of ever". Now, there may be some important things to learn from the way McDonald's does things, but it's an obviously ridiculous statement. Dave Ramsey doesn't seem to take disagreements or criticisms well, and that speaks volumes of him as a person.
Never make financial decisions in a vacuum. So much of your life is interconnected and a decision impacts much. In the case of the caller, he has twice as much savings as his mortgage balance. So paying off the mortgage is not putting all his eggs in one basket. We also don't know his age which would factor in the decision as well, if pulling money from a retirement plan. In today's economy keeping a good deal of liquidity is important, as is paying off debt. The only sure rate of return is paying off debt...investing in the market etc. has no guaranteed return. Age, marital status, retirement plans, rate of interest on the loan, health condition...all of these factors need to be considered. While I agree that paying off debt is best option in general, these other factors need to be considered as well rather than just a blanket answer of sure, pay it off. Ancient wisdom says "just as the rich over the poor, so the borrower is to the lender." Debt is slavery.
Debt is not slavery and only an idiot truly believes that. Debt is a promise to return something in the future and pay someone for having let you borrow it. Slavery is a lot more.
I have a mortgage. I'm not a slave anymore than you're a slave because you have to eat food every month. My debt is a monthly expense, nothing more, nothing less.
People who pull out that slavery comment need to get grounded back in reality and stop basing life off one line sound bites.
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