Popular Financial Guru Proposes An 8% Withdrawal Rule. Is That Realistic?

Recently, on his popular show, Dave Ramsey, a well-known, "financial expert" dismissed the common advice to withdraw only 4% of your retirement savings annually as "moronic," advocating instead for an 8% withdrawal rate. 

In this video, we talk through whether and when an 8% withdrawal rate makes sense.

Here's the answer: yes, it might make sense. But it all depends on the individual person and their situation. Finding the correct withdrawal rate will vary from person to person. To find that number, you need to account for life expectancy, spending habits, and market conditions.

Finding that number will ensure your savings will last throughout your retirement while allowing you to maintain your desired lifestyle.

Full Transcript:

Erin (00:02):

Ryan, good to see you. We are diving into the headlines today. A popular financial guru proposes an 8% withdrawal rule. I want to talk through whether that is realistic. So recently, Dave Ramsey, who is a well-known financial expert, dismissed the common advice withdrawal only 4% of your retirement savings annually as moronic. He is instead advocating for an 8% withdrawal rate. The financial world exploded following this advice. What do you think?

Ryan (00:33):

So I think Dave Ramsey does a lot of good for a lot of people when it comes to helping people get out of debt, save money, build up an emergency fund, and a lot of other things. I think Dave Ramsey does a lot of good, but there's some areas where it scares me some of the advice that's given, and this is one of those areas. Now, it's interesting because I think it comes from a good place because I think what he's really getting at is he wants people to feel like that they can retire, that this is going to be possible, that they don't have to have way more saved than they actually think they need to, which is something that I believe, I think a lot of people believe that they need to have a lot more saved or they need to work a lot longer in order to retire comfortably.

(01:21):

And so I think it's coming from a good place. He's saying, Hey, you can withdraw 8% of your portfolio. So as an example, if you had a million dollars, that would mean you could withdraw 8%, $80,000 the first year of retirement. And he's saying you could increase that with the rate of inflation over the course of your retirement. Now, if we're talking about a 30 year retirement, that scares me. Sometimes it might work out, but a lot of times it's not going to work out. That's not a sustainable withdrawal rate over time. So again, it comes from a good place, I think, but that scares me. If we're in a situation where our life expectancy is only 10 years and we're retired, maybe we've had some huge health problems, then of course our withdrawal rate's going to be much higher. But if we need that money to last for perhaps 30 years, which many people do because we are living so much longer, right?

Erin (02:15):

Right. 30 plus years,

Ryan (02:16):

Yeah, that's not sustainable.

Erin (02:20):

So Ramsey also recommended that retirees invest all their assets in equities. Wouldn't that be exposing retirees to a lot of risk and market volatility?

Ryan (02:31):

Certainly risk. I mean, certainly a lot of volatility as well. Now, interesting about this is that I'm not necessarily going to say that you shouldn't put a hundred percent of your portfolio into equities in retirement. Now that said tht there's some reasons why you may or reasons why you may not. Now, if you think that you can follow this 8% withdrawal rate rule or 8% withdrawal rate, I'll call it, and that it's going to able to sustain you for over the course of a 30 year retirement, you're going to be a hundred percent invested in stocks. That would be a big no-no over here because if the market goes down, portfolio goes down, now we're subject to sequence of returns risk. We sustain a large market pullback, then you need to withdraw money from that portfolio and you need 8%. That $80,000 of that million, just based on my example earlier, that's not sustainable.

(03:26):

But if you're in a great financial position, if you've got yourself in a position where you saved a lot of money and you only need a very small percentage of that portfolio over time in order to meet your spending needs, maybe you have enough from Social Security or from a pension or whatever it is, and now it's a very low withdrawal rate, you might be okay. A hundred percent invested in stocks purely from an objective mathematical portfolio construction point of view. Now that said, you may not be comfortable from a risk tolerance point of view, so we have to marry those two. That's really important in designing that retirement income plan.

Erin (04:05):

You got to sleep well at night. So you mentioned maybe if you know that you're not going to live much longer, but when else couldn't 8% withdrawal rate be sustainable?

Ryan (04:17):

Well, just if you think that you're going to have a shorter retirement. So it really goes along with that same one. If you don't think you're going to live as long, we talk a lot about people retiring at 65 just because it's just kind of what we think about. But not everyone retires at 65. A lot of people are continuing to work longer throughout retirement. Some are retiring earlier, but many people are retiring later, maybe at 70, 75, even 80 because a lot of us are healthier and we're able to continue to work longer, and a lot of people want to. And so is life expectancy really going to be 30 years at that age? Probably not realistic. So all this is always going to be on a case by case basis. Now, the only other thing I can think of offhand where that 8% withdrawal actually could make sense is sometimes if we're bridging the gap until we're going to take Social Security, that comes up a lot. Maybe we want to delay taking our benefit. Maybe we're taking one benefit. If we're married, we're delaying maybe the other benefit and that's not providing enough income. We need a lot more. Well, so maybe we're going to withdraw a lot more money for a few years. That can be okay. But then once the Social Security kicks in, that withdrawal rate goes down quite, that helps make that sustainable.

Erin (05:37):

So as we mentioned off the top, the general rule of thumb is a 4% withdrawal rate, but even this number is under debate. Why?

Ryan (05:47):

And I'm not a big fan of the 4% rule, but here's what the 4% rule is. If you're not familiar with it, the idea is that in the first year of retirement, you could withdraw 4% of your portfolio. So I'll just use that million dollars because it's a nice easy round number. So 4% of a million is $40,000, and then you would be able to increase the amount of your withdrawals by the rate of inflation each year. And over the course of a 30 year retirement, assuming you had a balanced portfolio, you would have had a very high likelihood of not running out of money over that period of time. Now, the issue that I have with the 4% rule is I believe it leads to a lot of underspending because most people I find don't continue to spend in a linear fashion all throughout retirement.

(06:36):

Most people tend to want to scale back their living expenses over time. As you get into your seventies and eighties, most people just aren't as active in wanting to do as many things. So a lot of times people just don't spend as much. Now in healthcare expenses, those are a separate animal. When I do planning, I mean those expenses are always going to continue to rise over time, and often they can rise quite a bit. But typically the 4% rule leads to a lot of underspending. I do believe people can typically spend more than that, even if we're planning for 30 years. But 8%, again, that's a scary number there.

Erin (07:15):

Okay, so then brass tacks, Ryan, what percentage are you recommending to clients and how often are you revisiting that number?

Ryan (07:25):

So it's certainly on a case by case basis, but let me give you a couple of examples. Even if we boosted that 4% withdrawal rate to 5%, and you may be thinking, well, that's only a 1% increase in income. Well, no, it's actually a 25% increase going from 4% now to 5%. That's a 25% increase in income. But even just going with a 5% I think is over a 30 year period. For a lot of people, I think it's going to be a lot more sustainable. Now, sometimes I've even designed plans where we're starting at 6%, but we're assuming what we're not going to have our expenses or we're not going to have our lifestyle keep up with the cost of living over time. We're just going to gradually reduce that. We're still going to withdraw more from the portfolio, but not at as fast of a rate.

(08:18):

We're not going to increase the rate of those withdrawals. So the short answer really there, Erin, is that it's on a case by case basis. It really depends on what your spending needs are, what you want your retirement lifestyle to look like. Maybe we'll want to plan in some certain vacations and we're going to withdraw more money for certain period of years. Maybe certain things on your bucket list that you want to make sure that you can go ahead and do. So again, it's hard to say. Sometimes I talk to people and say, well, that's over 30 years. What if I were to retire even earlier than that? If in an even better position, maybe you're able to retire at 55 and you could live it until 95. So now that withdrawal rate would probably be even lower. So again, it's always case by case.

Erin (09:05):

So many moving parts. Brian, if somebody would like to find their own unique withdrawal rate with you, what's the best way to reach you?

Ryan (09:14):

Well, could get in touch by going to the website, CravitzFinancial.com and go to the contact page there. Submit a message. Could always call as well, 714-462-9155.

Erin (09:29):

All right, Ryan, thanks so much for your time today. I really appreciate it.

Ryan (09:33):

Absolutely. Good to see you, Erin.