Weekend Reading – 8% retirement withdrawal rules? No thanks.
Hey Folks,
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!
Last weekend, I shared a number of common investing mistakes to avoid with thanks to Visual Capitalist.
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.
Sigh.
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
Geez…
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.”
And…
“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…
How might you spend more in retirement?
(Again, consider VPW = spend more in “good years” and plan to spend a bit less in bad (market) years.)
This is aligned to Variable Percentage Withdrawals (VPWs) that you can read more about below.
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?
These are Alain’s favourite funds to acquire his wealth with.
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.
How would you rate your financial literacy? Here is a free quiz!
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. 🙂
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
As I’ve often mentioned, if you generate more dividend income than you need to cover all expenses, then there is no need for a withdrawal strategy. You just withdraw whatever part of your dividend income you need at any given time and re-invest the rest or give more early inheritance to the kids/grandkids..
That actually means that there is no such thing as a down year. 🙂
I’m now 10.5 years into retirement and our annual dividend income has grown each and every year since retirement.
Also, as always, we are 100% invested in 12 TSX listed dividend income/growth stocks in 4 sectors (banks, utils, midstream, telcos) with no fixed income or GICs, no direct foreign exposure, no diversification, etc, etc.
Ciao
Don
Still only 12 stocks, no U.S. stuff Don? Do you have any FOMO with not owing U.S. assets way up this year,
It is our hope that eventually our dividend income will be > expenses, at least dividends will cover most expenses. That’s the plan.
No bonds and no GICs near-term for me!
Mark
Hey Mark
No US of any sort. I like the Cdn div-eligible tax rate. Also, I am very familiar with the TSX listed divy stocks.
Absolutely no FOMO for me as I am a dividend income/growth investor so am not that interested in total returns. Now that we know we have a 99.9999% chance of not running out of money, all total returns would affect is how big the inheritance is going to be. 🙂
Even though our portfolio is only up a small amount YTD, 2023 has been a successful investing year for us as our annual dividend income has increased by $11.5k. (it almost seems unbelievable but our current annual divy income is $197.2k).
Ciao
Don
Great stuff, Don – my goodness, you’re a dividend investing inspiration! 🙂
Mark
Hey Don, care to share what stock names you own, as I’ve been a CDN div/growth investor the last 12 years and am about to pull the fire trigger. Just wanting to see if mine align with what you have and if I may be missing something. I have VUN and VGRO in my RSP also and I’ve also got some closed end EIT.un for now.
Hey Lou
Congrats on your FIRE.
I never mind sharing what we own as it’s always interesting what others hold. Here’s our list by sector:
– Banks – BMO,BNS,RY,TD
– utils – CPX, EMA, and a minor position in AQN – only 1.1% of our total portfolio. We trimmed it with the divy cut.
– midstream – ENB,KEY,PPL,TRP
– telco – BCE,T
We always try and keep the book value the same for each of our 12 Mains. For the banks, we also hold some ZWB and divide its book value by 4 and count that as part of each bank’s book value..
Good luck in retirement. We sure have totally enjoyed these last 10.5 years!!
Don
Glad to see I virtually have the same…I do have some CM as well. I do have FTS…I don’t have CPX so will do a review of it, thanks for mentioning. I actually just sold my remaining portion of AQN after catching the bounce, sad to have to let it go.
Keep enjoying retirement and building a legacy. I can only hope to emulate your success…time will tell.
Lou
hey Lou
Thanks on the nice “legacy” comment. I honestly never thought we’d be in such a great position. It sure has worked out well.
For full disclosure, part of why we are doing so well is timely sells of BEP.UN, BIP.UN, NPI, all our REITs, and having a number of take-overs. At the end of 2020, I could see that pure renewables were totally flawed and hugely over-valued so we sold all of them. At the same time, I got tired of what I perceived as heavy financial engineering by Brookfield so dumped BIP.UN. On the REIT front, I didn’t like getting divy cuts and rarely seeing increases so we gradually sold all of them.
I actually did a spreadsheet exercise to see where we’d be if we had an equal position of our 12 Main holdings back on Jan 1, 2014. (chose that date so I could use 10 year charts and info). The divy income at that time would have been $66.8k. The current divy income if we had just let it ride without any additional investments (ie: just withdraw all divy cash) would now be $128.3k so would still have been very successful. It would also have been a little higher factoring in re-investing the extra dividends.
That’s cool on similar holdings. It does seem like something along the lines of what both of us hold is quite common but most people seem to hold more like 20-25 stocks.
We sold our FTS when the yield got under 4% and put it into our higher yielders. In hindsight, it would have been wiser to just reduce it to a minor position. As it turns out, we have gotten to a point where almost all 12 of our Mains have a $ value that is about as big as I want it to be. The only laggard is the banks and we will add what’s needed in the next year or two.
That means we will be looking to initiate some additional minor positions. Even though we have more than enough dough, I just can’t handle having a bunch of extra cash just sitting there. 🙂
Ciao
Don
Hey Don
I have every confidence that the banks will bounce back (we have one of the best banking systems in the world) and for now we are dollar cost averaging more shares with drips so a win win. I am happy to collect their dividends and keep on holding and dripping more of their shares. I am a firm believer in buying and holding quality companies.
Short term I plan on reducing my standard RRSPs (yearly topping my self directed TFSA)while allowing my locked in RSP to continue to grow before I have to turn it into a RIF(will pull half of it into RRSP) when I do the conversion. Then at 65 ill look at CPP and decide to hold off or get it while still drawing down some RRSP.
If all goes to plan, dividends will continue to cover all base costs while I ride off into the sunset 🙂
Thanks for your open candor on your methods as it makes me think and learn.
regards
Lou
Great stuff, Lou, I see lots of folks do a slow drawdown of their RRSPs in their 60s – moving some $$ slowly to TFSA as new TFSA contribution room opens up; including unlocking the LIRA as well.
Mark
Surprised you didn’t keep FTS, Don?
Biased on your holdings, own all of those as well Don:
-Banks = BMO, BNS, RY, TD
–Utilities = CPX, EMA, AQN (yes, AQN for me is just 0.4% of the portfolio now…)
-Pipes = we still don’t own KEY but do own = ENB, PPL, TRP
Yes, on the two telcos 🙂
I/we own minimal REITs for the same reasons now: tired of no dividend increases and minimal total return. I figure we have our house/condo as RE investing.
I continue to own the Brookfield stuff. I figure some lean years now should pay off well in 5-10 years; buying cheap. Just like the MSFT article I posted in my recent Weekend Reading. We’ll see??
All my best and continued investing success – you’ve done incredibly well with your plan.
Mark
Hey Mark
I’ve definitely noticed that you hold most of what we hold but also that you have quite a large number of of other holdings including a number of ETFs. I prefer the strong conviction strategy with the limited number of holdings. It has worked incredibly well for us and even a disaster like AQN hasn’t hurt us. In fact, our realized profit so far on AQN is $39.5k and we’re still in the green on our remaining shares. (of course, our original buy was in Nov, 2011 at $5.55 so it should have been much better 🙂 )
Trimming some FTS was fine with its lower yield but we should have kept at least a minor position. At the time, I didn’t know we’d be trimming so much of AQN. We’ll probably add some back to FTS in the next couple years.
KEY has become our favourite midstream, It’s really in great shape. PPL used to be our fav but I’m concerned they may do something stupid with buying Transmountain.
For TRP, I’m not too wild about them splitting the oil side out. I think the new TRP will be a great company and do regular divy increases but I think the new South Bow Corp will end up being a bit of a mess and eventually cutting their divy. I’m considering selling the oil side after the split so we’ll see how it all goes down.
For ENB, I wasn’t too wild about them saying small add-ons only and then turning around and taking on way more debt with the two recent gas util take-overs.
I suspect Brookfield will be fine but I just don’t feel comfortable with all the hidden stuff that goes on and with them being based out of Bermuda (a red flag for me).
Good luck to you as well as you approach your semi-retirement. Definitely a fun time.
Ciao
Don
Thanks, Don – I just try to keep saving and investing and catching up to folks like you. 🙂
I’ve owned AQN for some time, still “up” marginally but all good in my taxable account. I sold the small amount of AQN I did have in my TFSA and moved on from that… I got most of my AQN under $7 about a decade back.
https://www.myownadvisor.ca/weekend-reading-dividends-can-get-cut-edition/
Yes, you are a conviction guy. It has worked out very, very well for you and that is all that matters. No two portfolios or goals related to portfolios are alike.
We’ll see about TRP and the new company indeed.
I didn’t read that ENB closed the deal yet on those new purchases? I will continue to own them. ENB is about 3% of our overall portfolio.
I look forward to some part-time work/work on own terms in the coming year or so. My wife had already put her manager on some notice about her role to change in summer 2024 – so….it’s getting very real now. I hope we’ve made the right decision and can make it!
Mark
Ramsey’s holier than thou rants are definitely annoying. His investment advice is just nuts to be honest. He’s one of those guys who toots his own horn about how great he is, but he is a cheat. Check out the headline: “Dave Ramsey faces $150 million lawsuit for promoting company accused of fraud”. But for people who are heavily in debt and spend more than they earn, I actually think some of his advice is sound. Having a cash safety net for unexpected expenses or job loss, paying down debt aggressively if you’ve gotten into trouble, paying yourself first, not buying too big a house with a huge mortgage. I did all these things without needing to look for his advice, but I know people who could really benefit. These are common sense in my opinion, but some people don’t have much of it. LOL. I don’t necessarily agree with his debt snowball, paying the smallest balance first instead of the highest interest rate – the math doesn’t add up. He is also against any credit cards – also silly because I’ve had more than my share of free flights and hotel stays. But again, some people just don’t have self control so perhaps they need this sort of tough love
Thanks, Sandra. I definitely don’t agree with the math on the debt snowball for sure – with you there.
I would be surprised with all Dave Ramsey’s travel if he doesn’t have a credit card. I highly doubt he practices what he preaches. 🙂
Mark
The 8% withdrawal idea is a recipe for bankruptcy for a lot of seniors. Even the 4% rule can be very flawed in some cases. Frederick Vettese’s book provides a much better way of assessing how much to withdraw based on your individual situation.
It’s much more compatible with Warren Buffet’s principle of preservation of capital.
I certainly admire your diligence in building a dividend portfolio that will eventually pay a decent annual income by retirement age. However, you have some investment vehicles like low expense ratio ETF’s that weren’t available to me when I was your age. Its a good thing that you have them. I do disagree a bit about covered call ETF’s. In my view and experience, they can be very risky if the underlying equities are risky. On the other hand, if the equities they are invested in are diverse and conservative, they can provide a much more stable income stream once you are retired and not trying to actively manage your portfolio nearly as much anymore. My monthly dividends have changed little since I retired in 2018, even with all of the market fluctuations of the last 5 years. But you certainly don’t want 100% of your funds in the market; 30% to 40% is more like it. And you don’t want to touch your principle except in cases of significant emergency; you want to live off of dividends and interest.
Thanks, C.C.
Ya, covered calls can work for many, just not for me. I don’t see whereby the total return is consistently better than my mix of dividend stocks in Canada and/or just owning a low-cost ETF instead like XIU, ZLB, etc. Things/returns could change over time!
I prefer not to have 100% of my portfolio in stocks, although that % is very high. I’ve been trying to build a cash wedge for semi-retirement and it is our hope we’ll have ~ 1-years’ worth of cash / cash ETFs ready for any semi-retirement to begin potentially in 2024.
Our plan is to “live off dividends” and not touch the capital for the coming 10 years.
Mark
Your analysis of covered call ETFs makes perfect sense when you are in the portfolio building phase before retirement. This is because, as you allude to, you lose some of the growth potential of the security if the call gets exercised. And you have the time to ride out short term market fluctuations. I should have clarified a bit more that conservatively diversified covered call ETF’s are valuable after retirement, when stability of income and lower management workload is more important than occasional lost growth opportunities.
Thanks for the update, CC. Curious, any fav. covered call ETFs?
I can see the appeal of covered call ETFs, for the yield, but I think good, solid total returns are very important. Look at this year. Would you rather own QQQ or QYLD? 🙂 The 5-year returns between them are shocking.
Mark
I’m inclined to think that everyone’s withdrawal strategy needs to be catered to their risk preferences and what they are comfortable with. There is no one size fits all. I get most of these 4% or 8% or somewhere in between are only starting points. For me my plan will be to adjust the withdrawals to my yearly rate of return and my yearly needs. Bad years in the market will mean less taken out and adjusting my expenses downward to needs not wants. Good years will mean more travel and more wants. In retirement nothing can be written in stone. Especially your health and how long you need your nest egg to last, which to me is the biggest wild card of all.
Yup, very much aligned: “Bad years in the market will mean less taken out” and I also cut back a bit. “Good years” mean I just spend a bit more and live my life. I try not to overcomplicte it but I will share if it’s complicated on this site when I get there!
Cheers.
My first is Morphosys AG stock ticker on the NASDAQ,
My second is ON Semiconductor Corp ticker on the NASDAQ,
My whole describes Dave Ramsey and his opinions…
Dave Ramsey found a niche with Christian churches/orgs who often sponsor their congregants to go to his Financial Peace University course. I, too have never read any of his stuff but many people find that he is a good stepping stone into the Personal Finance world & some people find his stuff super helpful. Fair enough.
I guess I just feel that yelling and shaming people is just not my cup of tea and what may have worked in the 80s probably should be changed up now. I mean, it’s also easy to rag on the guy because in his “12 rules of hiring” his first rule of hiring is to pray and then he (illegally!) suggests that the hiring person go through a candidate’s PERSONAL BUDGET. Yikes! Also, let’s face it – it gives big grifter vibes when you are churning out new books on the same old, tired advice that anyone can get on the internet for free.
Thanks, Tucker. I simply suggest anyone avoid following anything Dave Ramsey says or does. 😉
Mark