Weekend Reading – 8% retirement withdrawal rules? No thanks.
Welcome to a new Weekend Reading edition…about considering an 8% safe withdrawal rate. Ya, we’ll get into that soon!
Here are some recent posts just in case you missed them!
We posted our October 2023 dividend income update, including any high-level plans to invest more in a few weeks.
Weekend Reading – 8% retirement withdrawal rules? No thanks.
It has been marketed by some financial advisors that if you want to be sure of making your retirement savings last (for the rest of your life) then in the first year of retirement you should withdraw no more than 4% of your portfolio’s value.
I’ll link to why the 4% safe withdrawal rate makes sense only for a starting point for your retirement readiness withdrawal rate but that’s it:
Well, some folks including notable personal finance authors and so-called experts believe even an 8% withdrawal rate is doable – based on 12% year-over-year returns too.
Enter Dave Ramsey.
Image, with thanks to Tima Miroshnichenko via Pexels.
Recently, Dave Ramsey recommended that retirees invest 100% of their assets in equities, from which they could withdraw 8% per year of the portfolio’s starting value, with each year’s expenditures adjusted for inflation.
Thus, if inflation is 3%, the retiree would start to withdraw $40,000 in Year 1 from a $500,000 portfolio (8%), then slightly more in Year 2, and withdraw even more in Year 3….and so on.
Here’s the reference and clip:
From the Ramsey Show (November 2, 2023):
This disturbing video rant from Dave Ramsey demonstrates an ongoing ignorance of safe withdrawal rates and sequence of returns risk, plus a combative insistence on using 12% average linear returns assumptions over decades.
Dave publicly… pic.twitter.com/Mh88TIoKVQ
— Marvin Bontrager, Ph.D. (@mbontrager5) November 9, 2023
Some “supernerds” countered this week with a huge rebuttal, rightly so:
“This logic of earning 12% and withdrawing 8% seems perfectly reasonable. Or would be if stocks always provided a 12% return. Unfortunately, stock returns bounce around a bit. In fact, the “theory” that supernerds use to explain the higher historical return of stocks is that people prefer investments that bounce around less. If investors are going to be rewarded with higher returns for taking risk, then there must be some risk.”
“Second, an average 12% return doesn’t mean that a retiree’s portfolio grows by 12% per year. If $1 million invested in stocks falls by 20%, you now have $800,000. If it rises by 25% the next year, you’re back up to $1 million. The average return of -20% and positive 25% is 2.5%. But you still only have a million bucks. Your actual return was zero.”
And further still…
“Ramsey suggests that retirees hold a 100% stock portfolio to safely produce $80,000 of spending from a $1 million nest egg. This sounds reasonable because bonds just don’t provide enough return to generate this kind of lifestyle. However, because stocks are more bouncy they can lose more money early in retirement. Supernerds refer to this as “sequence of return risk,” and we discuss it often which makes us lots of fun at parties.”
Depending on your sequnce of returns risks, following Dave Ramsey’s advice, your results are far from favourable:
“…you would have needed $3 million to maintain an 8% rule for just 22 years. A healthy woman who retired at age 65 would be just approaching her average longevity. This translates to just a 2.66% safe withdrawal rate to get her to an age where she has a 50% probability of outliving her savings.”
IMO, Ramsey’s advice is downright dangerous.
I’ve never followed him, never read any of his books, and never care to. His personal finance gospel never appealed to me.
- Every retiree should think very carefully about remaining in 100% stocks – 100% stocks could be fine if there are other, very dependable income streams like CPP, OAS or a workplace pension (or two) to rely on.
- Bonds or GICs or cash savings are always strong portfolio considerations beyond stocks for any retiree at any age since such holdings will offer a buffer from poor sequence of returns risks.
- Simply put: asset decumulation withdrawal years must be flexible, void of firm withdrawal rules, just like any spending in your asset accumulation years…
The obvious way to withdraw aggressively from any investment portfolio without depleting it is…to die early – but who wants to do that. I don’t think that appeals to you either!
I get 4% rules might be too conservative but an 8% withdrawal rate (or anything close) is bonkers and way too high. My suggestion is to ignore most safe withdrawal rates and instead come up with a variable spending plan and monitor that instead.
Always consider some portfolio offence and defence when it comes to investing.
And on this subject, my favourite from the week that was:
Stocks do about 5.5% real based on Dimson 2020 and Siegel 2014. Bonds do about 3% per year. So a balanced retirement allocation of 50/50 will do about 4.25%.
IF YOU’RE ASSUMING 8% REAL RETURNS WITH AN 8% WITHDRAWAL RATE YOUR RETIREMENT PLAN WILL pic.twitter.com/atxVC1APog
— Cullen Roche (@cullenroche) November 17, 2023
More Weekend Reading, including and beyond 8% retirement withdrawal rules…
(Again, consider VPW = spend more in “good years” and plan to spend a bit less in bad (market) years.)
I enjoyed this article from Humble Dollar: letting go of white elephants.
As a follow-up to my Fat FIRE post earlier this year, whereby some investors claim to need or want closer to $3M (million!) to retire with…on the other end of the spending continuum was guest writer Alain Guillot on Financial Independence Hub:
“I was told on Twitter that living on less than $24k per year is very frugal. Maybe it is, but I would like to explain how I live on less than $24K and I feel that I live like a king.”
Unlike Alain, based on our household decisions, I could not live on $24k per year.
Home maintenance + utilities (hydro, water, natural gas, internet, TV, cell phones) + our City of Ottawa property taxes + eating/groceries consistently exceed $2,000 per month on average. I also have a paid off car to maintain although I continue to like Alain’s frugal cycling choice!
Could you live like a king on $24,000 per year?
Kudos to Roger for his post:
“Sound #retirementplanning isn’t done based on a safe withdrawal rate. No one creates a plan and sticks to it throughout retirement. Goals and markets are messy….heck, life is always messy. The one constant I’ve seen in walking with retirees is CHANGE. Some are predictable, but most are not!”
I've been hesitant to comment on the @DaveRamsey vs. Supernerd kerfuffle. I’ve met them and think they are intelligent, wonderful people. The debate is, what is a safe withdrawal rate? 8% other 4%? This is an academic question. Sound #retirementplanning isn’t done based on a…
— Roger Whitney, CFP® (@Roger_whitney) November 16, 2023
Early Retirement Now also took issue with Dave Ramsey’s suggestion. Rightly so. Good take:
“Similarly, most of us in the FIRE community have graduated from Dave Ramsey. Or even better, many of us, myself included, never even required his services. We should all safely ignore his 8% withdrawal rate advice now. But I feel sorry for the Ramsey listeners. I hope they are smart enough to get a second opinion elsewhere before implementing his crazy, unhinged advice. But, for the love of God, please stay away from Suze Orman!” – ERN, Karsten.
Right on, Nick!
I've been studying investing for over a decade and there is no dominant strategy. What works in one period may not work in another.
The only thing I've concluded is—there are many ways to win.
Stop trying to find the best strategy and focus on finding the right strategy.
— Nick Maggiulli (@dollarsanddata) November 16, 2023
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Be safe and enjoy your weekend. 🙂