Ramsey’s 8% Retirement Rule Sounds Nuts At First

• Dave Ramsey recommends an 8% annual withdrawal rate for retirees who invest 100% in stocks.

• A 100% stock allocation in retirement creates outsized risk during market downturns with limited recovery time.

• An 8% withdrawal rate is well above the commonly-recommended 4% withdrawal rate.

• If you’re thinking about retiring or know someone who is, there are three quick questions causing many Americans to realize they can retire earlier than expected. take 5 minutes to learn more here

Finance expert Dave Ramsey has a lot of unconventional takes.  For example, he believes that you don’t need to care about your credit score at all and that you should avoid debt at all costs, not even using credit cards as a tool to earn rewards. A lot of financial experts disagree pretty strongly with those ideas.

Ramsey has also taken a position on retirement that runs counter to the conventional wisdom.

Specifically, Ramsey believes that you can opt for an 8% withdrawal rate as a retiree. This is at least double the customary recommendation, but Ramsey has some reasons for believing it’s the best choice.

Deciding how much to withdraw from your retirement and investment account is one of the biggest decisions that you will make as a retiree. That’s because, if you withdraw too much, you will drain your retirement accounts while you still need the money.  Since Social Security only replaces 40% of pre-retirement income, you could really find yourself struggling if you have brought your account balance down to $0 and can’t continue to live off savings.

Conventional wisdom says that one key way not to empty your accounts too fast is to stick to withdrawing 4% of your account balance. This rule is commonly referred to as the 4% rule, and experts initially projected that if you followed it, you would have around a 90% chance of your money lasting for a retirement spanning a minimum of 30 years.

Ramsey takes a very different stance, though. He believes you can withdraw 8% of your account balance per year.

Opting for this larger withdrawal rate could be very attractive if you need to take more money out of your accounts to fund retirement, or if you feel like you are depriving yourself of using your savings to enjoy your life as much as possible.

However, there is a caveat regarding Ramsey’s recommendation. He believes you should opt for this 8% rate only if you invest your entire portfolio in stocks.

Ramsey’s 8% rule, in theory, might make sense. After all, over time, the S&P 500 has produced a 10% average annual rate of return. If your investments are producing 10% per year, and you take out 8%, then your money technically should last throughout your retirement.

There are a few really big problems with this premise, though.

For one thing, the 10% average annual rate of return is an average. Your investments are probably not going to earn 10% every single year, and there could be some years when you lose money. If you’re keeping your withdrawal rate lower, this isn’t a big deal because you are not counting on your account growing every single year to allow you to enable such a huge withdrawal.

The other big problem is, if you invest 100% of your portfolio in stocks as a retiree, you are taking a huge risk. When you are older and retired, you are going to have to draw from your retirement accounts — either because you need the money, because required minimum distribution rules require you to make withdrawals, or both.

If you have your entire portfolio in stocks and you have a bad few years, you could suffer outsized losses that you don’t have time to recover from. And you could be forced to lock in a lot of those losses when you have to take out money at a bad time. This is simply not a smart way to manage your investment portfolio as a retiree.

You’ll be far better off and have a much more secure future if you:

• Follow the general guidelines of subtracting your age from 110 to determine what percentage of your portfolio to put into the market

• Follow the recommended 4% withdrawal rate.

Of course, you can also talk with a financial advisor to make a personalized retirement and withdrawal plan if you are hoping to invest more aggressively or withdraw more each year — but you should get that professional advice before you jump into following Ramsey’s suggestion and end up regretting it.

You may think retirement is about picking the best stocks or ETFs, but you’d be wrong. Even great investments can be a liability in retirement. It’s a simple difference between accumulating vs distributing, and it makes all the difference.

The good news? After answering three quick questions many Americans are reworking their portfolios and finding they can retire earlier than expected. If you’re thinking about retiring or know someone who is, take 5 minutes to learn more here.