PODCAST EPISODE 299 – Dave Ramsey can bankrupt you with this advice

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Hello, and welcome to sound financial group. My name is Paul Adams. I’m the founder and CEO of sound financial group. And I was joined by Corey earlier today in laying out this episode, but unfortunately, we were defeated by a remote recording technology. So he won’t be with us today. But he would like to wish you a Happy belated Thanksgiving as would I. And I hope the two of you that all of you two of you, both of you listening to the show that all of you out there, enjoy this episode today, where we’re going to talk about with safe withdrawal rates in retirement and the misinformation that’s out there, we’re going to be talking a little bit of an article that came out recently in the Wall Street Journal. And then we’re going to kind of contrast and compare the sage advice of the 4% distribution rate to the Dave Ramsey good growth mutual fund take out way more than your money can last strategy. So with that, let me share with you this article from our good friends over at The Wall Street Journal. They talk about the fact that retirement is back. And the 4% distribution rate is back. Now, the 4% distribution rate is those of you who’ve been listening to the show for a while have seen is this idea that you can only take out 4% A year from your investments, in order to have your capital base your capital at work last a sufficient amount of time and your old age such that you can continue to take income for the rest of your life. Well, what you can see here, the Wall Street Journal is mentioning that it’s back up to 4%. And it even says two years ago, Morningstar recommended starting with 3.3% distributions. And now two years later, it’s four. In reality, if you were taking four, you probably would have been fine even before they lowered to 3.3. Because they’re adjusting it in three year based upon market conditions. But if you have a strategy that is intended to work all the time, you shouldn’t have to massively change your retirement distributions because of one or two years. Now for those of you listening, we’re gonna recommend you go to our episode on the volatility buffer, which you can see as number one, number 239 income investing in retirement, we’ll make sure that Miranda puts that down in the show notes. But what they talk about is the reason the 4% rule works is because our portfolio investments can go down and when they do go down, we don’t want to take out more money while the market is down. Now the other thing, that’s a bit of a problem, I think, in the way they’re illustrating this is they are showing it as a method with 40% in stocks and 60% in bonds. Now, I think this is one of the most poor decisions somebody could make. And it has been a poor decision for a long time, this is not new. You see, when they say hey, you should get way more conservative at retirement. The problem is, all of the old days when they used to do that assumed that the average age person might retire at 65. But the average death was age 63. So that’s fine. If I’m only gonna live for five years in retirement, and I lived age 6970, well, then maybe I want to be really conservative. But in reality, if you’re retiring for a 20 or 30 year period of time, you need to have enough equities in your portfolio, that you are able to significantly outpace inflation. So they even say in here, that it’s a good idea. And you could take as much as 5.4%. If you only need 20 years of retirement income, how would you know? How would you know you just needed 20 years of retirement income? Because at age 55, you’re like, you know what, I think by 75, I’ll be toast or at 65. Like for sure I’ll be dead at age 85. So if I see my money dwindling, out at age 80, I’m going to feel perfectly fine about that. Of course, you wouldn’t feel perfectly fine about that. Retirees can spend more than 4% if they’re willing to be flexible, like running out of money flexible. Of course, you don’t want to do that. And my favorite recommendation, this article again, this is a good article in that it’s expressing to people you should take 4% But at the same time, they’re recommending overly conservative portfolios that are going to be eroded by inflation over time. And the final recommendation is article is other retirement income strategy. Jeez, is to have a 30 year letter of varying maturities of treasuries, that are the inflation protected securities, just do those. And the downside is this last line of the article, the downside is that the retiree would deplete the tips ladder by the end of year 30. So that’d be a terrible idea to put yourself in the position that you are going to run out of money on an almost certain basis by buying inflation protected securities, like yeah, you’re not going to have a lot of volatility. And the reason we’ll have a lot of volatility is your money is going to slowly get depleted every single year out for 30 years. And let’s just think to ourselves, what does it feel like to be healthy, relatively young, and be nearly running out of money? Now, what we want that would be success is does our money, give us the income that we want for the rest of our years and leave behind what is whatever is important to us leave behind? What this article leaves out is not only does it throw out some portfolio structures, that are obviously suboptimal, like 40% in stocks and 60% and bonds. Not only is that obviously suboptimal, but then they go as far as to recommend that you could just put it all in inflation protected securities. So I’m having all kinds of problems with my Apple Watch talking to me. So I’m having a fuss with it here, guys. Sorry. If you hear Siri talking in the background, that’s not me intending to do that, but I probably just triggered it again. I think we’re good now. All right, so let’s see what some other financial pundits have to say about this 4% distribution rate? Well, Dave Ramsey has something to say. So let’s jump in and see what he said,

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I’m 72 years old, and my wife is 70. We’re both in good health, we have a combined Retirement and Social Security income of about 140,000 a year, we own our home outright and have no debt. We have about $100,000 in Roth, and 1 million in traditional IRAs are wonderful. I know, Steve, our wonderful financial advisor is recommending a distribution of no more than 4%. We’re looking at about 5% to enable us to travel while we’re able to what is your recommendation on the maximum annual distribution? It’s a great question. And they’re in a good spot. And so this makes me feel better about saying, Sure 40,000 versus 50,000. On the distribution is what they’re really asking right? On, let’s say, the million dollars in traditional IRAs, that’s going to be taxable. This doesn’t feel like a big portion of the world if they’ve got, you know, the 140,000 income.

7:45

So if the money is invested in good mutual funds, and it’s making, you know, average market returns of 11% 12%.

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Alright, you guys hear that the average market returns of 11 or 12%. Now, here’s the thing. He’s saying average market returns of 10, or 12%. Let me show you guys something. This is a mutual fund and ETF screener, you can access this on your own looks like mutual funds.com. I’ve included all ETFs, all mutual funds, active passive, individual and advisor based mutual funds. And you can see here, I couldn’t get like a 20 year history, anything like I couldn’t get any other screeners to give me that even our Morningstar license seemed to only give me 10 or 15 year time horizons and not able to boil it down like it like. So this gives you something you could reference on your own. And what you can see is there’s about 30 per page. Now out of the, I don’t know, 40, some 1000 mutual funds that exist? Well, there are about three pages of mutual funds that even had a 10 year return above 12. So let’s just end and by the way, he’s only recently dropping it to 11 or 12%. So let me show you guys this mutual fund screener here, I didn’t have my screen showing to you. So this is what it looks like. I’m on the second page now. Or third page now. And you can see 12% 12% 12% So about 25 funds out of the entire universe of available mutual funds, even have a 10 year history of 12% or above. That’s it. So that’s that like 7080 mutual funds maybe that have over a 10 year above 12 person average. Now that average also may not be the average you think if you look at some of our other episodes, you’ll see an up year and a down you’re don’t exactly equal out and most of the time what they’re using here is the arithmetic average, but it does say they’re using the 10 year total compound growth. So that might be accurate. But the bottom line is Dave Ramsey, there weren’t that many. Number two out of the 4030, some 1000 mutual funds you might be able to buy into. How would you have known which one of these were the one that was going to do over 12? At the beginning, you see, he never gives you that information. So he’s in good growth mutual fund 11 12%. Let’s pick up where he left off.

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Why can you only take out 4%?

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Just fear, I think is the main reason people do it.

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Why would a financial advisor say that?

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He gets more money. Is that how that works? Possibly.

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So let’s pause there. So not only does he say 11 12%, giving no grounding for it. But then he says the reason the advisor might say the difference between four and 5% is because of the advisors interest. You see this as the problem. Not only does he not offer factual information, but he also obfuscates it by simply incriminating the person that would say something different than him. This is a really important fallacy to understand is that if you bring something up to somebody like a fact, or recommendation, and their way of answering it isn’t to give you counter factual information that would allow you to have more data and make the decision yourself. Instead, they throw out an opinion and then incriminate, the person that offered the other assessment, which is exactly what Dave did here.

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are possibly he is a financial planning, lemming. You know living is, that’s an old school word. These are small rats that run in herds and follow each other over cliffs.

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That is the funniest way I’ve heard to describe financial advisors.

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And so it meaning you go along with the crowd, you go along with the crowd, you go along with the crowd, and you don’t even ask why you just go along with the crowd.

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Now, by the way, to Dave Ramsey, it would be okay to go along with the crowd, as long as you’re with his crowd. You see, he’s fine if you do what he says without understanding it. But if you do something else that maybe is based upon a ton of evidence, and a lot of math, and overwhelming support by economists in that you have to have a distribution rate that’s significantly less than your rate of return, such that you don’t accelerate the erosion of your capital during the down years. Doing that and thinking for yourself makes you a lemming.

12:32

And so you don’t want be sheeple. So here’s the thing, that is a standard thing in financial planning 4%. Because after inflation, and after poor rates of return on the portfolio, you’re still gonna be okay at 4%. But by God, 5%, you’re gonna sink it, you know, which is completely asinine. That’s just ridiculous.

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There’s on

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Steve, you are smarter than your financial advisor, because you have more money than he does. And you’ve done a better job than he has. So you can kind of tell him what to do with your money. Be real comfortable doing that. And dude, if you want to pull out 6%, it’s okay with me, I think you’re gonna be okay. If you don’t pull out 10% You’re not going to destroy the portfolio. Because, dude, I mean, you’re 70

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if you want to take out 10%, he says, You’re not going to destroy the portfolio. So to test this, let me show you what I did. I set up a retirement scenario in our software for Dave Ramsey. And I gave the client a million dollar 401k. And no security income, no nothing else, we have a nice clean representation of this 401k And somebody taking a distribution. Now the first distribution I’m taking, and then inflation adjusted, in this case, at two and a half percent going forward, of 4%. That’s $3,333 a month. Now, what this system is doing is something called a Monte Carlo scenario. What a Monte Carlo scenario does is the Monte Carlo scenario takes like a big bingo ball. And in the bingo ball are all the various returns that you might want to have the returns and their likelihood in there. So there aren’t very many of the super high years or super low years. And there’s a lot more of those middle years if you can kind of picture that on a bell curve. So the ball gets turned, one ball is taken out of the tumbler they look at it, they say that’s this year’s return, and they put it back and it turns again, and they pull it out then next year return. They do that for the entire span of the client’s life. And then they redo it 3000 times to come up with a percentage likelihood that your level of distribution would be able to be maintained by your portfolio for the rest of your life. If you guys look here, you can kind of get a sense of The the amplitude or the differential of potential returns, and I added this person at age 65. I know Dave’s person is in their mid 70s. But we just made the Dave Ramsey sample client, this very, very simple, you know, span of potential outcomes and the probability of retiring, if you take out that 4% distribution, even adjusting for inflation, shutting your eyes hoping for the best for all of retirement, you have a 96% likelihood of success. But now, he just said, kind of at the top of his lungs, you could take out 10%, and you’re not going to ruin the portfolio. So that would be 8333. Now when I hit refresh on this, what it’s going to do is the proposed plan is going to adjust to the new likelihood of this 10% distribution. Again, I gave this the greatest amount of Dave Ramsey philosophy, which is I gave him the all million and I put this in 100%, stock portfolio, emulating some of the good growth mutual funds that he might refer people to. So now we’re taking out $100,000 A year from our Million Dollar Portfolio. Hmm, well, yeah, you’re not going to destroy the portfolio in 13% of the cases, but the entire rest of the cases, you are going to absolutely crater, your investments, and one day be in a position. In fact, the median outcome is you’d be out of money by age 78. Because you’re taking 10% out in the up years and the down years, and when you take money out in the down years, you accelerate the erosion of your capital, destroying the ability of your portfolio to be able to rebound and give you the income you want for the rest of your life. Okay, Dave, what else do you have to say?

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Well, you gonna live to 170, you know, you’re not going to wind this thing down. You’re not gonna you’re not gonna tear the principal up and 25 years even doing that,

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okay, you’re not going to tear the principal up even doing that referring to the 10% distribution, I beg to differ. According to this, we might have the portfolio totally blown up in a matter of seven years, if the market doesn’t cooperate, midterm, like the median outcomes, is that the money could be gone by 78. Dave, like this high distribution rate is really, really bad. And the client, you’re saying is smarter than the advisor. And I make no judgment based upon that except to say, the advisor is giving good advice. Now, I will give like is that big of a difference between the four and 5% distribution now, you could probably do five, if you don’t take as much for inflation in future years. And you could model that out. But he’s saying you could take 10. And there couldn’t be anything further from the truth that you could consistently sustain a 10% distribution rate.

17:59

So you can be in a position to enjoy your life. And so I would suggest five, maybe 6% drawdown on this, if you’ve got it invested in good mutual funds that are giving you market rates of return. And I also would suggest that you’re wonderful. That’s what he called him, right? Wonderful. Yeah.

18:20

Now, right before he does more to besmirch this advisors advice, who’s actually doing a pretty good job? Why don’t we just check our little math here, and let’s just make it this 6% distribution rate, instead of four, so that’d be 60,000 a year, that’s going to be 5000 a month. Let’s just test Dave’s advice. And what happens to our probability, it’s still down to 72%. There is some likelihood in the mid range or low mid range, you could run out of money, like it’s a real problem, to just casually say, Oh, just do six could be a huge issue, and could put you in a position that you would run out of money, or

19:02

it’s wonderful financial advisor, have a better have a good explanation for why he is giving you these numbers. If you’re getting an 11 or 12% rate of return, why are you suggesting that 5% is going to destroy my life when 4% does not.

19:17

See that’s just it? Nobody said this advisor said 5% distributions would destroy their life. They said 4% distribution is the highest likelihood of being able to have your portfolio last as long as possible. At least I don’t I would bet you he didn’t say it’s going to destroy your life.

19:33

It’s not logic. 1% is

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not life changing either way,

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what’s not logical? It’s, there’s nothing. It’s only based in that standard card industry standard a file in the industry.

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So he’s saying it’s just a standard card you pull if you’re in the industry, except we just gave you all the math to back that up. And by the way, I’m not the only one. You can see on the right hand side of this YouTube video there. Are other people who are just showing the math and be like Dave is hurting people talking about an unrestrained withdrawal rate with no grounding behind it whatsoever.

20:12

I am curious, Dave, would you say what’s the strategically the best route to go using the Roth portion, first versus traditional

20:19

and retired traditional is got a mandatory distribution, you guys tribution. Anyway, you know, the seven and a half that he’s going to have to begin. And so I’m going to start there, and at least do the mandatory, the Roth is tax free, and will pass tax free, I’m probably going to use the traditional, I’m probably gonna go and pay the taxes on it and pull out enough to pay the taxes on it. Before I touch the Roth.

20:44

Now, I would go with Dave on this, by the way, like, just, if I had a choice I would spend if it was me, I would spend my IRA before I’d spend the Roth. And yet that I think for a client recommendation, you have to know a lot more about them, their family, what kind of legacy they want to leave. But I mean, all in all, that’s not bad

21:02

about the Roth continue to grow tax free, because it will pass to your heirs tax free as well. So that’s, that’s the good news on that deal. So good question. So

21:12

good question, they say, but here’s what it comes down to y’all. We have to be in a position, we hear a pundit say something, that we have a coach or an advisor that will sit and do the math with us. Like the Dave Ramsey isn’t bad in and of himself, there are plenty of actual financial advisors out there that kind of roll like he does, like they just sort of condescend to you a little bit. They act like they know more than you. And they don’t take the time to increase your understanding and knowledge on the topic. They instead work to have you accept them as the authority. And you’re just to do what they say. If anybody’s doing that, and not putting you in a position to better understand it. Of course, you should always make your own decision. We even tell our clients, it’s like we’re the navigator of the ship. And you’re the captain, the navigators job is to give you a sense of what the journey is going to be like, and what might be the best path to arrive at the destination that you want to be at. And what are the challenges is going to be on the way there? And how do we protect ourselves from those challenges. That’s an advisors role. And advisors should not be telling you what to do, and certainly shouldn’t put you in a position that you would feel like you couldn’t ask them the question or able to do the math. And if you notice that advisor condescends down to you. Like that’s a good indicator, that may be somebody that you don’t want to listen to about your money, at least not without double checking the math. And in this case, Dave Ramsey is bringing up some things that we could show again, and again and again, just like I did, in our Monte Carlo scenario, we’re able to demonstrate that his distribution rate would not work, his distribution rate would absolutely run somebody out of money. And that increasing the distribution rate does increase the risk. Now that’s okay, if you want to increase that risk. The problem is Dave Ramsey is not communicating to his listeners how big the risk is, of them just casually saying I’ll take six or eight or 10. And you’re smarter than your advisor you might be, you might be smarter than your advisor. But that advisor is actually giving you sound and prudent advice with the 4% distribution. And that’s why for most of you listening, Dave Ramsey, he doesn’t have the answers. Because if you’re listening the show, you probably aren’t going to retire on 100,000, you’re probably going to need to retire on three or 400,000. If you need to retire on three or 400,000. The distribution rates aren’t as meaningful because you can go from a $350,000 income to a $280,000 income and still pay your bills. It’s a lot harder to go from $80,000 income down to 50. And still pay your bills. So with that, be sure that whether you’re listening to The Wall Street Journal, or you’re listening to Dave Ramsey about something as important as the distribution rate you’d take for the rest of your life. Just have whoever you’re working with, run different scenarios for you and see the likelihood of running out of money for yourself. Don’t believe Dave, don’t blindly believe your advisor. Help them help you to better understand the financial philosophy you’re working with. And then you’ll make better decisions about your money going forward. And if you feel like you’re not getting that call us, you can always reach out to us at info at SFG wa.com Of course there’s links to LinkedIn and other videos and all that good stuff here in the podcast. I would ask you guys take the time to subscribe take the time to like this video because if you don’t other people are going to see this Dave Ramsey content and they will end up taking too much money out of their portfolio. The poor guy who’s Email was lucky enough to get selected for the show may well be driven down the primrose path. They’re running out of money because he feels like he’s doing 100% The right thing because Dave gave him a blessing to take distribution rates up to 10%. And we don’t want that to happen to anybody. We hope that what this does you liking subscribing this video put a comment below say you disagree with me. The algorithm loves the comments, loves the likes, and is more likely to get this in front of more people and help them too. And as always, we hope that this episode has been a contribution to you being able to design and build a good life

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