There are 3 main types of personal finance advice. #1-Consumer debt reduction and avoidance advice. #2-Investment advice. #3-Retirement planning advice. Many people assume that Ramsey is an authority on all 3. However, his main focus and his most valuable information has always been focused on #1 (helping people dig out of debt). For #2, and #3, it's best to seek professional advice from other sources.
Well stated. I like Dave Ramsey, and I think he is a FANTASTIC starting point for people that lack financial literacy, and specifically want to begin a debt-free journey. But once that goal is achieved, it's time to look elsewhere for investment and retirement guidance.
The problem is Dave acts like he's a retirement expert too and doesn't recommend that people should talk to a fee only financial advisor about what a good safe withdrawal rate is for everyone's specific situation.
And Dave does tell people to get advice. The thing about getting advice from Dave versus some guy with a shingle out, Dave is willing to talk about HIS journey.
Ramsey is good, but I think Erin is a little better in bringing in the sweet spot for most people. She also seems to factor in different circumstances, such as age and portfolio aggressiveness into the equation. Probably for most, between 5.5 and 6.5% is a little closer to the sweet spot. Savers tend to be overly conservative, which is really not good either. You have to take some chances in life. And if your odds are above 85% success rate, take that chance.
Agreed, Dave has a bad habit of name calling, to try make his advice seem true. He is great at teaching the get out of debt. Once out of debt start following someone else
I feel it is age dependent. For example - if you are 95 years old than 15% may be low. If you are 30 years old than 4% may be high. I am 55 and plan to retire at 62 and my withdrawal rate will be 4%
When my dad was in his 80s, he moved from his home to an assisted living place. His studio apartment, in NJ, before he transitioned to a nursing home, ran over $90K per year. Once he moved to a nursing home, the expense was over $10K per month, and this was over 7 years ago. As we age, particularly for those who may need some form of physical assistance, it can become quite costly.
@@stevemaggs6781 This is a totally different video that I hope Erin does someday. I'm 65 and have been putting money away earmarked for many things, Car fund, vacation fund, college fund for my kids and their kids, and I started an assisted living fund two years ago. mainly from moving funds around. There are plans you can buy into for this ( but I have done zero research into them) but at 65 I feel like I can stay in my house for the rest of my days. These days it's a trust thing like people selling timeshares, you don't want to go into something that when you go to use it you find out it's horrible. I would rather have plenty set aside and let my kids put me in the best one they find that fits my savings and is close to them.
It’s definitely an individual decision with many considerations including requirements like RMD’s. But no matter how much you withdraw, it really depends on what you do with the money!
There will always be RMDs. Why does everyone act like they are some major roadblock in their retirement plan? If my investments do so well that I have to take out more than planned when I am 73, that is a good thing because my investments did better than I planned. Of course careful monitoring of my gains could allow me to take out more during the go years so I dont have to take out more than planned when I hit the RMD years.
It took me a year of analysis to determine my safe withdrawal rate. Mine is 3.5%. My situation is different than most as I know live in Europe so I don’t have the same issues as those in the US. I feel very comfortable with what I’m pulling out as my financial advisor tells me I can take more safely and can take more lavish vacations than we do. I don’t have to worry about healthcare which is huge and if the country I’m living in starts having problems and inflation becomes a drain, I can always move somewhere else…
You're right about healthcare. Living abroad means you don't have to accept prevailing conditions in the US as the norm. It's depressing to think that if you're looking for affordable medical care, you'd be better off almost anywhere else.
Yeah, where I live. I only need to pull out 3% and that’s what I’m going to do. My expenses are extremely low. I can live off of 900 a month that pays everything. My house is paid. I have a tiny little house very cheap to run I have no bills no debt, so I’m quite content with just taking out 3%
I agree that Dave Ramsey's suggestion of an 8% withdrawal seems aggressive. However, as a 55 yo, I appreciate seeing where a 5% withdrawal (vs 4%) might be reasonable. Thanks for including the respective slides for that, Erin. It's very helpful!
Looking at the chart you present at 6:04, you see that it matches up pretty well with Dave's advice. He hasn't recommended Bond funds for retirement, and if you are invested in 100% stocks, then at 8% you have an 80% chance of your funds lasting 25 years, which is longer than the average lifespan. And, as you mention, this data includes the Great Depression (why would any historical data start before that?), which skews the numbers downward. Great segment, Erin!
Very true! I mean, even the are based off these charts say a 7% withdraw safe, if you’re not adjusting up for inflation. So his recommendation is pretty darn close!
When planning for retirement, are we not supposed to prepare for the worst? Also that isn't adjusted for inflation, at the end of 25 years those withdrawals are only going to be 64% of what they used to be, assuming 2% annual inflation. Table 2 at 6:34 paints a much more realistic picture, showing that 8% withdrawal is a coin flip in terms of success.
@@thursdaythought7201 Actually, I don't. The "worst" is impossible to prepare for. To me, the problem with over-conservative estimates is that it makes your investments artificially inadequate. For example, if you need $40k / year, at 4% withdrawal rate you need $1M. If you assume 3%, you need $1.5M. etc.
5:12 The CDC gives figures for Life Expectancy in the USA as Males: 73.5 years and Females: 79.3 years. This obviously goes up if you are saying for a person 60 years old because the math cuts out those that have already passed, but does not cut out those on the far end of the scale. For those age 20 - 60 this produces a skewed forecast which is about 6 years more (greater the younger a person is). I like knowing the stats and getting an idea of what I'm working with; however, I find investment companies tend to use these types of picture because it splays the potential for retirement needs to press for greater investment. In planning for retirement a true picture should also include that some will end of natural or unnatural means before reaching their retirement.
Another reason Ramsey's % might be higher is that he assumes that people go into retirement debt free. For those people retiring with a mortgage, paying for kids' weddings and/or college expenses, etc. the initial percentage will probably be lower.
Dave investment advice is always willfully optimistic nuance lacking trying to muster up some enthusiasm in his lowest common denominator audience (fiscally, not critique on their character). You just cant tell a 40yo with a negative net worth and a bunch of CC debt they need to save 25x their expected spending. Will disengage them with no hope. I am more of a pragmatist and will shoot for 5% with 4% as a stretch goal. Too many variables to have a realistic model. Anyways great and sensible take as usual erin
Not scaring the kids seems right. Dave tries to incorporate psychology that seems to work for a type. One is that he recommends paying the smallest bills first regardless of the cost. Say you have a car loan at 12% with $20k to go and a credit card at 22% with $30k and and scavenged an extra $400 a month. I'd expect he'd say pay the car off first, feeling they would have a greater sense of accomplishment by knocking a bill out quickly.
I'm planning on a 5% WDR. However, I will have a separate bucket that I will draw out of if my main withdrawal accounts are in negative rate territory. In other words I will stop my withdrawal from my main accounts and draw from a 'cushion bucket'.
I plan on being flexible in my approach to drawing money each year but as a rough guide I think I'll likely be 5% in the go-go years, 4% in the slow-go years and 3% in the no-go years, i.e. an average of 4% over a 30 year period. The 3% in the no-go years may seem low given that there may be long term care costs but I also haven't factored in the value of my home which could be sold or any inheritance, so on balance I think it will be ok.
0:49 time mark: You reference the Trinity study of 1998 as the origins of the 4% rule. Most financial experts attribute the 4% rule to William Bengen's research study published in the October 1994 issue of the Journal of Financial Planning. He has been misquoted as recommending investors withdraw no more than 4% of their savings, when what he actually said was that 4% is what could be safely withdraw UNDER THE WORST CASE CONDITIONS. (Under general market conditions, Bengen said closer to 7% would be a safe withdrawal rate.)
2:06 Honestly, I’m questioning the logic behind why a higher withdrawal rate of 8% would require a lower portfolio balance than a lower withdrawal rate of 4%? Seems to me the opposite is true. If I’m going to withdraw at a higher rate, wouldn’t I need a higher portfolio balance in order to sustain my income through retirement?
I thought the same until I used the amount of the withdrawal- that gets you to the total. 8% of 500000 is $40000/yr. To get $40000 using a 4% withdrawal rate you need $1000000 nest egg.
Shes not saying 8% will get you through retirement, just that if you pull 8% this is how much you need to pull from to get to your target income. If you had a higher portfolio balance then to get 40k you wouldn't be pulling 8% you would be pulling a smaller percentage.
My retirement plan is to live off of dividends and rental property income. Paid off my first home, worth $500k, two years ago. Excited about the future!
And I think that is where Dave is coming from. Dave famously doesn't have much of his portfolio in stocks and bonds, and is mostly in debt free rental properties and businesses. Compared to his literal money put into those properties, he likely is making 10%+ of yearly return, so 8% withdraw, when you aren't actually liquidating the underlying asset, may be where he gets his weird number from... But it certainly isn't a safe withdraw rate for stocks, and I don't think he will ever explain how he got to his 8% number because the dude clearly doesn't know how to do finances. Sales people are really good about generating income... They aren't people you want drawing up a fiscally responsible budget. And Dave didn't get rich by being smart, or fiscally responsible... He would probably be more wealthy is he could do math and was fiscally responsible lol. Dave is a sales guy, so go to him if you want to lean how to do sales. Going to a book and course sales man to learn how to do finances is crazy.
True but, following Dave's plan of "baby steps" has helped me grow my portfolio from $0 in 2005 to over $3.5 million today. Hey the mind set and do whatever is necessary. We all follow our own unique paths, in life ... 🤔🤔🤔
Dividends are usually not the correct concept unless you have very specific taxation requirements. Lots of the best companies do not even issue dividends.
I still have an issue with the table shown at 7:11 because it implies that higher withdrawal rates need lower initial portfolio amounts (I made a similar comment on an earlier video). I think there should be a third column showing expected duration which will go from 25 years at 4% withdrawal rate to 11.1 at 9%.
@@michaellong2791The math is done by dividing the $50,000 by the portfolio size. So 50,000 / 1,250,000 is 4%, and 50,000 / 555,555 is 9%. It's just the size of the annual withdrawal in relation to the portfolio. But obviously, the higher withdrawal rate depletes the smaller 7:08 portfolio much faster (ignoring inflation and capital appreciation for simplicity).
I believe the audience that listens to Dave probably have a lower monthly budget amount!! As a result they probably have more of that monthly budget covered by social security and therefore do not need to replace as much during retirement. This will allow for most of them to still stay around a safe withdrawal rate. If you couple this with the fact that you usually slow down your income needs in your 70/80’s it probably works out fine for his average listener. I bet if you took a poll of his listeners they are not pulling 8% simply because they have structured their lifestyle to not need that much!!
I think if you have the 4% rule as a benchmark and have withdrawals as a dynamic where you take 2% if the market crashes, then 4% on an average year and a 6-12% in a good year. The best thing to do is have 10% cash and take 4% out when you need it that year and then the 6% cash rebalance in November of that same year to where it is 10% cash. That seems to be a decent strategy and an example of it.
Great video - thanks! I'm not comfortable with anything less than 100% with the understanding that nothing is really 100% certain. Withdrawing at a higher rate for anything other than necessities seems inappropriate considering the consequences of running out of money.
I believe I heard his 8% comment and think it was taken out of context. I am pretty sure he didn't specifically say you should withdraw 8% in retirement. In fact it wasn't really retirement advice at all. In response to comments about how 1 million dollars isn't as much as it used to be, he suggested 1 million dollars could provide $80,000 a year to replace a modest salary (assuming an 8% market return). Now while we do know inflation would erode that, his point is not wrong; a million dollars is still a lot. Your take however to point out the 4% number is different for everyone is very valid. The 4% rule of thumb is actually different for everyone as everyone will have a different timeframe of retirement and different sizes of nest eggs and spending habits.
If you are willing to give up some predictability then making your money last forever seems pretty simple. Put your money in large index funds that pay dividends and then never sell your shares. Live off of the dividends. If you can do this then your balances are extremely unlikely to ever go to zero. If the S&P goes to zero we've all got much bigger problems, for example. If inflation hits company profits will also catch up since the prices of all of their products going up is a symptom of inflation. The dividends will likely increase as well.
If you rely on dividends then you will miss out on growth stocks. When a company issues a dividend then its value declines by an amount equal to the dividends. So (excluding tax issues) there is no functional difference between selling shares and taking dividends. Many large US companies do not issues dividends because share buy-backs are more tax efficient.
@@kxjx If you are retired, you are more interested in income and preserving the value of what you already have. Dividend stocks are a compromise between growth and income that has a good chance of accomplishing both goals.
@@rhaacke mathematically you are incorrect. The price discovery mechanism of the market equalises the price of dividend and non dividend stocks. So (on average) taking a dividend and selling an equivalent stake of a non dividend stock are exactly the same. The *only* time it makes any difference is if you are in location where dividends and capital gains are treated differently for tax. If you are thinking you need to buy dividend stocks for any reason other than tax planning you are almost certainly wrong and going to end up costing yourself significant lost wealth.
Excellent video! You explained the question and the different options very well. I especially liked the idea that one should not take the least possible out! Those in retirement need to move beyond the "saving" mindset into the "spending" mindset. That can be hard to do.
Everyone should also have a backup plan for creating the necessary retirement income in the event that you are beginning to outlive your IRA account due to withdrawing too much, given the rate of return. One type of backup plan is owning a home with an in-law suite or room you can rent out if necessary or working if you're able. In our situation, we have adequate home equity, which would allow us to downsize and use the proceeds to beef up our savings if necessary.
I really like that you are taking the time to ask us about your thumbnail images. I make me feel like we are having a conversation. Thank you for that and All your great content! 😊
I took early retirement six years ago from the federal reserve bank, and I live completely off of Dividends and options income. I don’t have to worry about timing the market or selling shares to pay the bills, or something called sequence of return risk. It’s peace of mind.
I asked my financial advisor about the 4% rule. And he laughed. Saying that great if you wanna leave it all to your children. We didn't discuss it any further as I'm not ready to retire yet. In the UK the state pension will more than covet all my bills 😊😊
Hey Erin, With all this talk about the safe withdraw rate, it would be great if you had a video discussing different withdraw strategies. I know you had one on the 3 bucket strategies; but, maybe one on the guardrail strategies, or geometric spending rule? Just a thought.
Great information Erin! Here is my two cents on this, Assumptions are only rough estimates not guaranteed, the withdrawal rate depends on all other factors such as the portfolio ratios, market performance, and inflation, its not fixed percentage, if we withdraw consistently with out taking all these factors into consideration then there is a possibility of loosing the networth drastically over a period of time
I always appreciate the clarity of Erin's presentations. The charts are also very helpful. In the first chart (non-inflation adjusted rate of withdrawal), I can see a few examples of where Dave's 8% withdrawal rate could make sense. For example, withdrawing at the 8% rate for the first 10-15 years (which the 1st chart indicates a very good chance of success) while holding off to start Social Security at age 70, and then drop your withdrawal rate to just fill the gap between Social Security and living expenses after age 70. Although I don't plan on withdrawing at the 8% rate, Erin's presentation provides a little more reassurance that we have wiggle room on the withdrawal rate that we do eventually choose.
Bill Bengen asked a question that had little to do with retirement and most financial advisors use his answer to give poor retirement advice. Bill's book has a number of tables. The most important ones show indicate how much money is left at the end of the expected life span. In the case of a 4% withdrawals from 50:50 distribution of investments the money almost certainly runs out at about year 32. Makes the last few years a bit concerning. The situation is much better for 100:0 (all stocks). But the premise that retirement economics starts at retirement is just wrong. We have a long history of working and hopefully saving and investing for retirement. That is where the mistakes are made.
The question under discussion is how to avoid over-shooting: which in practice means either retiring much later than you could have or missing the opportunity to spend much more money in the early years of your retirement before you get infirm
I use what I call the Lean Years rule. That is for lean, poor market years like Rona virus when the market corrects like - 25% I would withdraw a lot less, say 85% of normal. It is almost natural, thus allowing me to set a w/d 6% target.
Is the grid at 1:56 correct? It seems some numbers are switched there? I would think if I am withdrawing more, I would need more money in the portfolio?
Why are still backing Dave Ramsey he’s flat wrong call him out for somebody that promotes money management and leadership qualities then on live radio throws his own employee under the bus is this quality you want in your CEO all you are being lead by the nose by wolf in sheep’s clothing
With a planned large cash buffer and a relatively aggressive fund mix, I’m planning for 6%. On down years, I would opt for 0% to avoid selling at the bottom. But I’m still 8-10 years from retiring so I don’t worry too much about this today.
@@dantheman6607 I’ve been thinking 250-300k too. I’m undecided to wait until late to quickly save this amount, or slowly over 8 years. 8 years is probably safer because you never know what the future brings. You?
@@HoustonTom Definitely will have a cash buffer to offset down years in the market. I’m 55 so cant think of SS yet, I’ll have a modest pension too so that will help. I’m thinking I’ll need at least a 200k cash reserve/emergency fund. 2022 showed us the importance of having a back up reserve outside the markets.
@@dantheman6607Since retirement in 2017, I've maintained a years expenses in no risk investments. That would weather me through the worst parts of most bear markets. There's also the downside that all that money is sitting around doing nothing for you. Although recently you can earn ~6% on that money.
@@dantheman6607My plan is 5 years of living expenses, which should get me thru any modern market downturn. In exchange first that, I plan to keep a high percentage invested in securities so my money will continue to compound about as much as it does now.
I feel that 4 percent is a little too conservative for most people. It's based on a worst case market performance and doesn't account for other sources of income like social security right? I think a 5 percent withdrawal rate is good to start with at least. The amount of social security and other sources of income will also determine a safe withdrawal rate.
I think I'll be retiring around 50, and I plan to take a lower percentage (say 3%) when the market is down and a higher percentage (maybe 5% - 6%) when the market is up. I'm not a big spender and I don't see that changing later on in life.
I am 63, have a military and GS pension. I am using 5.5% withdrawal rate until I start drawing SS. At that point, I will scale down to 4%. 65% Bond, 25% Stock, 10% Cash (CD).
@@Iffy50 12% rules out bonds and index funds, on average. My 5 yr average on my IRA is just over 10% return (funds and stocks) and my brokerage account (all stocks) is not quite 17%. My 401K, a bond heavy target date fund, performed pooly for years then took a bath 2022---that sure wont cut it! Maintaining an average of 12% means cultivating good stocks and have a plan when the mind goes.
@@Iffy50it isn't necessarily that crazy. Far be it from me to defend Dave as I think he is a modern Christian scam artist who sells bad advice for a high price while hiding behind supposed values. But there are a lot of legal stable investments that can offer a 10%+ yield that people seem to ignore. BDCs, RIETs, and closed end funds are all required to pay a percentage of profits to shareholders, and the share holders pay taxes on those profits instead of the business. So if you own those inside of a Roth or something then you can pretty easily earn a 10%+ dividend with minimal risk to asset depreciation or tax concerns... But also not likely to have asset growth either. But if the goal is income instead of growth it is a good way to go. A lot of rental properties and small businesses can yield 10%+ per year on cost with relatively low risk. The initial setup can be a growing pain and learning curve, but after a few years a steady 10% return would be a low expectation. There are stock funds that provide options, or which trade volitility. Similar to BDCs, their value tends flat to slightly down over time and you loose tax advantages, but they can often pay a consistent 15%+. So again, if cash flow is the goal, it isn't a bad way to go. A lot of dividend investors calculate dividend on cost, and it is crazy to see how even 2% dividends can yield 20% on cost after a decade or two of dividend increases. The real time dividend may still be a mere 2% on cost, but over time you get asset appreciation, and dividend growth that seems impossible until you run the numbers. It isn't going to be 10%+ on cost overnight, but over time the rate of return can be rediculous for what looks like a 2% dividend on paper. Dividend investing is awesome, and I don't understand why people down play it so hard when it offers such great results and significantly less volitility compared to traditional growth stocks. But for general stocks and bonds... No way a 12% average return is considered normal, or where an 8% withdraw is reasonable. That is crazy talk, and dangerous for Dave to suggest doing without a lot of context!
sequence of return risk is not being considered in daves 8% advice - its horribly irresponsible to ignore or worse be ignorant of this market risk - AVERAGE returns dont mean shit if you retire into a lost decade - you wil be financially ruined - period.
Bill Bengen did an exhaustive study and came up with the 4% rule in 1993, although he didn't coin the phrase. What he found was a withdrawal rate of 4.15% NEVER failed in a 30 year retirement.
Depends where you live. I am British but i have lived in Canada for the last 15 years and plan to retire here. Both the UK and Canada have great social healthcare so that is not an issue for me in retirement. Also it depends what other income you have. I willl have 2 defiined benefits pensions from the UK and a full state pension. In Canada. I will get about 60% of OAS and CPP which are government pensions. That is 5 sources of guaranteed income for life. Akso i have a substantial RRSP which is equivalent to 401k which i intend to draw down early before my government pensions start. My buffer will be my tax free savings which is not considrereed as income from my TFSA which is like IRA. Remember, when you pass, the government are going to want their tax back so will take at least half of what you have left but cant touch what is in your TFSA / IRA
The amazing thing is how pathetic a 4 percent rate of return is. When one looks at all the hype the investment sales community pumped at us even a 6 percent withdrawal rate being " excessive" would looking backwards mean that all the rate of return they claimed and suckered our money into the mutual funds etc really constituted fraud.
Keep in mind its a 4% withdrawal rate if your expenses increase with inflation. So if we are assuming a 2-3% inflation then this really means you are supposed to be averaging 6-7% returns to be safe.
One of the most sobering questions that you ask yourself when you are planning your retirement is "Just how much longer do you think that you will live" - that is - how long will you need your money to last. While I won't be facing RMDs until next year, I have been using the RMD withdrawal rates as a guide. Its a sliding percentage withdrawal rate that increases as you get older and its base adjusts each year depending on the size of your portfolio which grows or contracts depending on market performance. The IRS has the RMD table calculated out past 100 and I figure that if I get that old, I'll be too delirious to understand - or care - anything about withdrawal rates.
I actually discussed this in the video I have going live on Monday. Originally it was planned to be today’s video, but then, based on what was the financial conversation on the Internet, I filmed this video and published it today instead 😊
I have a 60/40 portfolio that has returned an average of 6.75% in the last 10 years. 4% yearly withdrawal sound good to me. All depends on your portfolio and your basic needs.
I think the fact you have to plan on higher spending in the first 10 years you could probably so something like an 8% withdrawal rate and every 3 years you reduce it a percentage till you get to 4%. I think of my grandparents and they loved yo travel but by their mid 70s the travel they did nearly completely stopped.
One thing I have never heard a retirement channel discussing is the concept of rebasing. The 4% withdrawal rate method of guaranteeing your savings will last 30 years (using historical data mind and with a minimum 50% invested in equity) allows for yearly inflationary increases. Let us say that at any point in time your portfolio performs better than 4% plus accumulated inflation i.e. it grows in real terms. In that scenario you can rebase to take 4% (and in later years 4% plus inflation) on that higher sum and still have a 30 year guarantee that you won’t run out of money. In fact you can withdraw a higher amount still as it is less likely that you will live another 30 years from that point. Your portfolio doesn’t know the history of growth and loss, nor of your historical drawings. It is simply a value you have at that time and might have invested from scratch at that time for the purposes of applying the 4% rule. An example should illustrate. Let us say you invest $1m on retirement and for the first 5 years withdraw $40k per year, inflation adjusted. Let us say inflation over that period is 10% but that the market has outperformed the 4% plus inflation mark. Let’s assume the portfolio is worth $1.2m at that juncture. You can now withdraw $48k that year instead of the $44k you were originally planning, and $48k p.a. plus inflation thereafter (ignoring the fact that you might draw more if you are unlikely to survive the next 30 years). What if the portfolio value subsequently drops below that high point? You don’t have to reduce your withdrawal rate as market downturns are part of the 4% model. Simple.
So most financial planner today plan for a retirement to 95… which is WAY over your 82, and 85 number… Which is right ? I dont know… but it makes a BIGGG difference in the plan…. planning for 95 is much more a better plan tho...
Erin exudes a calm common sense approach to this subject. Dave Ramsey getting overly agitated on this subject should be troubling to many, including his family.
Both numbers are only rough guidelines. Better to start with exactly how much do you need to pay your bills! If you need to withdraw 10% just to pay your bills, then you need to get a job in retirement! If you can pay your bills with some extra, in that 4-8%, with your life expectancy (realistically 15-20 years after 65 for male), start there but be prep'd to reduce during bad market years.
The correct answer: a dynamic withdrawal rate. Take what your investments give you on any given year. Your emergency fund is there to cover shortcoming on any down years.
I’m not a big fan of annuities but a 65 year old male can currency lock in a single premium annuity at 7.7% withdrawal rate If longevity risk keeps you up at night maybe use social security and an immediate annuity to cover your minimum living expenses I’m planning on using a 5% withdrawal rate and delaying social security until age 70
My wife and I are 70ish. We’re maintaining roughly five years of cash spending equivalents and the balance in stocks. This gives us a 80/20 stock/cash portfolio. We’re currently spending about 5.5% of our total portfolio per year.
@@tancreddehauteville764 Not really. If their annual budget is $50K a year, that would be $250K in cash and about $1 million in stock. That would be about a median retirement nest egg.
The “ideal rate of withdrawal” must, necessarily, take into account your remaining life expectancy, projected inflation, expected lifestyle, leaving an estate to your heirs, market volatility and expense risk, unforeseen costs. The “ideal rate” is a function of an actuarial calculation that takes into account that there is only one way to diversify for life expectancy, leaving an estate to your heirs.
Advice is just that: someone's opinion, and it should always be taken with a grain of salt. No two people's situations are the same, and therefore, no solution is always going to work exactly the same for everyone.
Even an 80% success rate seems pretty good. You can always adjust as markets and inflation changes. As long as your budget is discretionary and can easily take out lower during down times.
Great overview. What would you suggest is someone never wants to reduce principal and leave a medium size legacy for their kids? Say somewhere around $1 million leftover?
Well, the problem is that life expectancy is a bell curve, not a line in the sand, and few people enter retirement knowing precisely when they will die. So, we are forced to save and withdraw based on how long we "might" live rather than how long we are "expected" to live, or we risk running out of money. Planning for a 15-year retirement and then living to 95 could be a bit of a problem, and a scary one at that. Someone who wants a high withdrawal rate should probably consider adding a simple income annuity into the mix, as it is the only way to protect against longevity risk aside from over-saving and under-spending (or moving in with your kids).
Good point, but another strategy for a couple is to ensure one high SS Check for the survivor. In today’s dollars that would be $3-4k per month. Our survivor check will be $4500, and we have a small longevity annuity. So we are planning on spending our portfolio over 20 years with a 5-7% WDR. Owning your primary residence also helps. Both our mom’s are 87 and “survive” on about $2300/mo with no portfolios. An extra $1000 and they would be ecstatic.
As a person gets closer to retirement, transitioning from growth funds/etfs to dividend funds, allows for less volatility without getting nowhere with bonds, but having income without having to sell as many shares from the portfolio. Having a 5-6% dividend rate, which is easily achievable, combined with social security, should be more than enough to keep up with inflation and provide a comfortable lifestyle in retirement without worry and stress.
th-cam.com/video/Hhg6dB2UcAs/w-d-xo.html That fear is reasonable, Dave's great at helping people eliminate debt and start saving their nest egg, but his quoted rates of investment return and sustainable withdrawal rate are misleading, imo. Yes, historical actual rates of return are factual, but what folks actually GOT is always lower, cause they do stupid things along the way (sell low and buy high). So you're not getting the return he's planned for you AND you're not making it to the end of your life with all your money by blowing 8% evey year (see above link by math nerd who actually makes a living in finance, vs what Dave does, essentially entertainment/education). Oh, btw, I always question why people think taking MORE money out in good years is sustainable. Do you take less money out in bad years to balance that? If not, then haven't you lessened your sustainability?
that is a great video. a lot of retirees talk about the 4% rule without really knowing much about it and get scared when hearing about how you can draw higher rates rather than 4%.
I tend to view three or 4% as the absolute minimum, the truth of the matter is most people can withdraw at a greater rate than that, and still have a successful portfolio
@@ErinTalksMoney i retired at 55 in 8/21 with 95 equities/5 cash and since then have gone through the cash except for a small amount. i am drawing 3% annually first 2 yrs but at the start of the 3rd yr i gave myself an inflation adjustment 1 yr delayed. only drew 3% intitially due to age of retirement, 100% equities as well as legacy issues. so far 3% is adequate for our needs but i will increase it later and may use 4% vs guyton klinger at 5% closer to 60 y/o.
@@Random-ld6wgDon't forget you will likely be able to drastically reduce that when you take Social Security. Sounds like you are on a safe conservative course.
@@hogroamer260 i plan to take it at 70 y/o (2036) so i hope i still get 100% of what is promised instead of 70%. i still have 4 yrs on my mortgage that i am paying with my 3% draw so i get a 20K raise in 4 yrs.
Can we go with conditional withdrawl rates, something like: 6% if your holdings are up more than 15% 5% if your holdings are up 10-14% 4% if your holdings are up 7-9% 3% if your holdings are up 4-6% 1% if your holdings are up 1-3% 0% all else
Your holdings will vary depending on when you started investing. If you started investing 35 years ago and never sold your positions, it wouldn't be crazy for most of your holdings to be up 5,000% over the lifetime of the holdings. Thats the power of compounding growth.
@@zackcinq-mars2129 Going with 35 years is 50x reasonable? It's reasonable to assume you might double every 8 years. That's a 9 % compounded return. So in 35 years you would be between doubling 4 times and doubling 5 times. Mathematically, that would be between 16x and 32x. So 50x would have to be getting substantially better than the market. You'd have to buy positions in MSFT in 1986, AMZN in 2010, or similar. Not impossible, but not the likely outcome either.
Some good points here. Something you overlooked: the 4% withdrawal rate assumes that bonds will perform they way they used to. That is, decent performance, low volatility, and low correlation. All three assumptions have proven false. They perform worse than cash, highly volatile, and highly correlated with the stock market. Meanwhile, there are much safer ways to invest in the stock market than in the past. Lower fees, better diversification, and ways to scale your investment more precisely to the level of appropriate risk. This makes it possible to go in harder on stocks and eschew bonds altogether, getting better performance AND lower risk. So, we can do better than 4%. I'm sticking with 4% since I retired early, but 5% is fine for most people. 8% is silliness.
There are 3 main types of personal finance advice. #1-Consumer debt reduction and avoidance advice. #2-Investment advice. #3-Retirement planning advice. Many people assume that Ramsey is an authority on all 3. However, his main focus and his most valuable information has always been focused on #1 (helping people dig out of debt). For #2, and #3, it's best to seek professional advice from other sources.
Well stated. I like Dave Ramsey, and I think he is a FANTASTIC starting point for people that lack financial literacy, and specifically want to begin a debt-free journey. But once that goal is achieved, it's time to look elsewhere for investment and retirement guidance.
The problem is Dave acts like he's a retirement expert too and doesn't recommend that people should talk to a fee only financial advisor about what a good safe withdrawal rate is for everyone's specific situation.
Very well stated! I couldn't agree more!
I never thought about it but you're 100% correct. Of course if you've mastered step 1 then steps #2 and #3 become *much* easier.
And Dave does tell people to get advice. The thing about getting advice from Dave versus some guy with a shingle out, Dave is willing to talk about HIS journey.
If it were possible for Dave to share his wisdom without arrogance, I’d be more inclined to listen.
I appreciate your approach.
Haha, totally agree. But I have to say Dave has grown on me a little.
Dave's a bit like Winston Wolf in Pulp Fiction, here's my advice, pretty please, with sugar on top...
Ramsey is good, but I think Erin is a little better in bringing in the sweet spot for most people. She also seems to factor in different circumstances, such as age and portfolio aggressiveness into the equation. Probably for most, between 5.5 and 6.5% is a little closer to the sweet spot. Savers tend to be overly conservative, which is really not good either. You have to take some chances in life. And if your odds are above 85% success rate, take that chance.
Yes, anyone who doesn’t agree with him is “an idiot”.
Agreed, Dave has a bad habit of name calling, to try make his advice seem true. He is great at teaching the get out of debt. Once out of debt start following someone else
The best & balanced voice on this topic. Not burning DR, not saying you know everything. Just being a straight shooter. Well done!
I appreciate your going deeper and not being content with just simple answers.
I feel it is age dependent. For example - if you are 95 years old than 15% may be low. If you are 30 years old than 4% may be high. I am 55 and plan to retire at 62 and my withdrawal rate will be 4%
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Even 75% might be too low at 95
When my dad was in his 80s, he moved from his home to an assisted living place. His studio apartment, in NJ, before he transitioned to a nursing home, ran over $90K per year. Once he moved to a nursing home, the expense was over $10K per month, and this was over 7 years ago. As we age, particularly for those who may need some form of physical assistance, it can become quite costly.
@@stevemaggs6781 This is a totally different video that I hope Erin does someday. I'm 65 and have been putting money away earmarked for many things, Car fund, vacation fund, college fund for my kids and their kids, and I started an assisted living fund two years ago. mainly from moving funds around. There are plans you can buy into for this ( but I have done zero research into them) but at 65 I feel like I can stay in my house for the rest of my days. These days it's a trust thing like people selling timeshares, you don't want to go into something that when you go to use it you find out it's horrible. I would rather have plenty set aside and let my kids put me in the best one they find that fits my savings and is close to them.
Agreed. I'll bet the difference between even age 65 vs 70 for retirement could be the difference between 5% and 8%.
Best explanation of the Ramsey 8% argument. Well done.
Retired. 59 yrs old with 1 mil. 85% stock 15% cash. 6% withdrawal till 66 then SS. Will then take 3 to 4%. Nobody seems to factor in SS.
Why not delay S.S. to 70 to get a larger slice of "guaranteed" income if your health and family genetics are good?
For those of us who are younger, SS doesn't seem like much of a guarantee.
It’s definitely an individual decision with many considerations including requirements like RMD’s. But no matter how much you withdraw, it really depends on what you do with the money!
There will always be RMDs. Why does everyone act like they are some major roadblock in their retirement plan? If my investments do so well that I have to take out more than planned when I am 73, that is a good thing because my investments did better than I planned. Of course careful monitoring of my gains could allow me to take out more during the go years so I dont have to take out more than planned when I hit the RMD years.
Erin, that’s the best explanation of the different withdraw rates I’ve heard. Great job
Thank you! 🙏
the only answer that is always correct when it comes to personal finance is "it depends"
It took me a year of analysis to determine my safe withdrawal rate. Mine is 3.5%. My situation is different than most as I know live in Europe so I don’t have the same issues as those in the US. I feel very comfortable with what I’m pulling out as my financial advisor tells me I can take more safely and can take more lavish vacations than we do. I don’t have to worry about healthcare which is huge and if the country I’m living in starts having problems and inflation becomes a drain, I can always move somewhere else…
You're right about healthcare. Living abroad means you don't have to accept prevailing conditions in the US as the norm. It's depressing to think that if you're looking for affordable medical care, you'd be better off almost anywhere else.
Quality of care and timeliness of it is the question. US is not all bad, it leads here actually.
@@fractalelf7760 Actually, that is incorrect.
3.5% is ultra-safe and OK if you worry about running out of cash.
Yeah, where I live. I only need to pull out 3% and that’s what I’m going to do. My expenses are extremely low. I can live off of 900 a month that pays everything. My house is paid. I have a tiny little house very cheap to run I have no bills no debt, so I’m quite content with just taking out 3%
I agree that Dave Ramsey's suggestion of an 8% withdrawal seems aggressive. However, as a 55 yo, I appreciate seeing where a 5% withdrawal (vs 4%) might be reasonable. Thanks for including the respective slides for that, Erin. It's very helpful!
Looking at the chart you present at 6:04, you see that it matches up pretty well with Dave's advice. He hasn't recommended Bond funds for retirement, and if you are invested in 100% stocks, then at 8% you have an 80% chance of your funds lasting 25 years, which is longer than the average lifespan. And, as you mention, this data includes the Great Depression (why would any historical data start before that?), which skews the numbers downward. Great segment, Erin!
Very true! I mean, even the are based off these charts say a 7% withdraw safe, if you’re not adjusting up for inflation. So his recommendation is pretty darn close!
When planning for retirement, are we not supposed to prepare for the worst? Also that isn't adjusted for inflation, at the end of 25 years those withdrawals are only going to be 64% of what they used to be, assuming 2% annual inflation. Table 2 at 6:34 paints a much more realistic picture, showing that 8% withdrawal is a coin flip in terms of success.
@@thursdaythought7201 Actually, I don't. The "worst" is impossible to prepare for. To me, the problem with over-conservative estimates is that it makes your investments artificially inadequate. For example, if you need $40k / year, at 4% withdrawal rate you need $1M. If you assume 3%, you need $1.5M. etc.
5:12 The CDC gives figures for Life Expectancy in the USA as Males: 73.5 years and Females: 79.3 years. This obviously goes up if you are saying for a person 60 years old because the math cuts out those that have already passed, but does not cut out those on the far end of the scale. For those age 20 - 60 this produces a skewed forecast which is about 6 years more (greater the younger a person is). I like knowing the stats and getting an idea of what I'm working with; however, I find investment companies tend to use these types of picture because it splays the potential for retirement needs to press for greater investment. In planning for retirement a true picture should also include that some will end of natural or unnatural means before reaching their retirement.
Great video! There is no correct answer, there is a sliding scale of odds. Thank you for presenting this info so well!
That was the best content i've ever seen on this topic. Thanks a ton for doing this video!
Wow, thanks!
Dave Ramsey didn't just "suggest you could make an 8% withdrawal on your retirement." He was livid about those arguing you shouldn't.
5% will be fine for me when I retire at 60 or 65. I plan to stay 100% in stocks.
Woo. Thinking I'll do 75 stocks, 20 bonds, 5 cash
Another reason Ramsey's % might be higher is that he assumes that people go into retirement debt free. For those people retiring with a mortgage, paying for kids' weddings and/or college expenses, etc. the initial percentage will probably be lower.
He also doesn’t like people retiring before absolutely necessary, so his numbers are for people well into retirement age, not those retiring “early”.
Dave investment advice is always willfully optimistic nuance lacking trying to muster up some enthusiasm in his lowest common denominator audience (fiscally, not critique on their character). You just cant tell a 40yo with a negative net worth and a bunch of CC debt they need to save 25x their expected spending. Will disengage them with no hope. I am more of a pragmatist and will shoot for 5% with 4% as a stretch goal. Too many variables to have a realistic model. Anyways great and sensible take as usual erin
Accurate!
Not scaring the kids seems right. Dave tries to incorporate psychology that seems to work for a type. One is that he recommends paying the smallest bills first regardless of the cost. Say you have a car loan at 12% with $20k to go and a credit card at 22% with $30k and and scavenged an extra $400 a month. I'd expect he'd say pay the car off first, feeling they would have a greater sense of accomplishment by knocking a bill out quickly.
I'm planning on a 5% WDR. However, I will have a separate bucket that I will draw out of if my main withdrawal accounts are in negative rate territory. In other words I will stop my withdrawal from my main accounts and draw from a 'cushion bucket'.
I love employing a bucket strategy
I plan on being flexible in my approach to drawing money each year but as a rough guide I think I'll likely be 5% in the go-go years, 4% in the slow-go years and 3% in the no-go years, i.e. an average of 4% over a 30 year period. The 3% in the no-go years may seem low given that there may be long term care costs but I also haven't factored in the value of my home which could be sold or any inheritance, so on balance I think it will be ok.
0:49 time mark: You reference the Trinity study of 1998 as the origins of the 4% rule.
Most financial experts attribute the 4% rule to William Bengen's research study published in the October 1994 issue of the Journal of Financial Planning. He has been misquoted as recommending investors withdraw no more than 4% of their savings, when what he actually said was that 4% is what could be safely withdraw UNDER THE WORST CASE CONDITIONS. (Under general market conditions, Bengen said closer to 7% would be a safe withdrawal rate.)
2:06 Honestly, I’m questioning the logic behind why a higher withdrawal rate of 8% would require a lower portfolio balance than a lower withdrawal rate of 4%? Seems to me the opposite is true. If I’m going to withdraw at a higher rate, wouldn’t I need a higher portfolio balance in order to sustain my income through retirement?
I thought the same until I used the amount of the withdrawal- that gets you to the total. 8% of 500000 is $40000/yr. To get $40000 using a 4% withdrawal rate you need $1000000 nest egg.
Shes not saying 8% will get you through retirement, just that if you pull 8% this is how much you need to pull from to get to your target income. If you had a higher portfolio balance then to get 40k you wouldn't be pulling 8% you would be pulling a smaller percentage.
My retirement plan is to live off of dividends and rental property income. Paid off my first home, worth $500k, two years ago. Excited about the future!
And I think that is where Dave is coming from. Dave famously doesn't have much of his portfolio in stocks and bonds, and is mostly in debt free rental properties and businesses. Compared to his literal money put into those properties, he likely is making 10%+ of yearly return, so 8% withdraw, when you aren't actually liquidating the underlying asset, may be where he gets his weird number from... But it certainly isn't a safe withdraw rate for stocks, and I don't think he will ever explain how he got to his 8% number because the dude clearly doesn't know how to do finances. Sales people are really good about generating income... They aren't people you want drawing up a fiscally responsible budget. And Dave didn't get rich by being smart, or fiscally responsible... He would probably be more wealthy is he could do math and was fiscally responsible lol. Dave is a sales guy, so go to him if you want to lean how to do sales. Going to a book and course sales man to learn how to do finances is crazy.
True but, following Dave's plan of "baby steps" has helped me grow my portfolio from $0 in 2005 to over $3.5 million today. Hey the mind set and do whatever is necessary. We all follow our own unique paths, in life ...
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Dividends are usually not the correct concept unless you have very specific taxation requirements. Lots of the best companies do not even issue dividends.
I still have an issue with the table shown at 7:11 because it implies that higher withdrawal rates need lower initial portfolio amounts (I made a similar comment on an earlier video). I think there should be a third column showing expected duration which will go from 25 years at 4% withdrawal rate to 11.1 at 9%.
Yeah, I still don’t understand that math.
@@michaellong2791The math is done by dividing the $50,000 by the portfolio size. So 50,000 / 1,250,000 is 4%, and 50,000 / 555,555 is 9%. It's just the size of the annual withdrawal in relation to the portfolio. But obviously, the higher withdrawal rate depletes the smaller 7:08 portfolio much faster (ignoring inflation and capital appreciation for simplicity).
I believe the audience that listens to Dave probably have a lower monthly budget amount!! As a result they probably have more of that monthly budget covered by social security and therefore do not need to replace as much during retirement. This will allow for most of them to still stay around a safe withdrawal rate. If you couple this with the fact that you usually slow down your income needs in your 70/80’s it probably works out fine for his average listener. I bet if you took a poll of his listeners they are not pulling 8% simply because they have structured their lifestyle to not need that much!!
Thanks for this. Everyone's situation is different as you've explained. For me there seem to be a lot of great options at the 6% level
I think if you have the 4% rule as a benchmark and have withdrawals as a dynamic where you take 2% if the market crashes, then 4% on an average year and a 6-12% in a good year. The best thing to do is have 10% cash and take 4% out when you need it that year and then the 6% cash rebalance in November of that same year to where it is 10% cash. That seems to be a decent strategy and an example of it.
Great video - thanks! I'm not comfortable with anything less than 100% with the understanding that nothing is really 100% certain. Withdrawing at a higher rate for anything other than necessities seems inappropriate considering the consequences of running out of money.
I've been withdrawing 5.5% for 5 yrs now. My balance is going up a little every year
I believe I heard his 8% comment and think it was taken out of context. I am pretty sure he didn't specifically say you should withdraw 8% in retirement. In fact it wasn't really retirement advice at all. In response to comments about how 1 million dollars isn't as much as it used to be, he suggested 1 million dollars could provide $80,000 a year to replace a modest salary (assuming an 8% market return). Now while we do know inflation would erode that, his point is not wrong; a million dollars is still a lot. Your take however to point out the 4% number is different for everyone is very valid. The 4% rule of thumb is actually different for everyone as everyone will have a different timeframe of retirement and different sizes of nest eggs and spending habits.
The best rate is what works for you. Everyone has their own individual situation which will affect this number.
awesome graph showing bonds/stock mix and success rate! thank you
If you are willing to give up some predictability then making your money last forever seems pretty simple. Put your money in large index funds that pay dividends and then never sell your shares. Live off of the dividends. If you can do this then your balances are extremely unlikely to ever go to zero. If the S&P goes to zero we've all got much bigger problems, for example. If inflation hits company profits will also catch up since the prices of all of their products going up is a symptom of inflation. The dividends will likely increase as well.
s&p yield is 1.64% so to get $40000 instead of 1 million you'd need more than 2.4 million.
If you rely on dividends then you will miss out on growth stocks. When a company issues a dividend then its value declines by an amount equal to the dividends. So (excluding tax issues) there is no functional difference between selling shares and taking dividends. Many large US companies do not issues dividends because share buy-backs are more tax efficient.
@@kxjx If you are retired, you are more interested in income and preserving the value of what you already have. Dividend stocks are a compromise between growth and income that has a good chance of accomplishing both goals.
@@rhaacke mathematically you are incorrect. The price discovery mechanism of the market equalises the price of dividend and non dividend stocks. So (on average) taking a dividend and selling an equivalent stake of a non dividend stock are exactly the same.
The *only* time it makes any difference is if you are in location where dividends and capital gains are treated differently for tax.
If you are thinking you need to buy dividend stocks for any reason other than tax planning you are almost certainly wrong and going to end up costing yourself significant lost wealth.
Excellent video! You explained the question and the different options very well. I especially liked the idea that one should not take the least possible out! Those in retirement need to move beyond the "saving" mindset into the "spending" mindset. That can be hard to do.
Everyone should also have a backup plan for creating the necessary retirement income in the event that you are beginning to outlive your IRA account due to withdrawing too much, given the rate of return. One type of backup plan is owning a home with an in-law suite or room you can rent out if necessary or working if you're able. In our situation, we have adequate home equity, which would allow us to downsize and use the proceeds to beef up our savings if necessary.
I really like that you are taking the time to ask us about your thumbnail images. I make me feel like we are having a conversation. Thank you for that and All your great content! 😊
I took early retirement six years ago from the federal reserve bank, and I live completely off of Dividends and options income. I don’t have to worry about timing the market or selling shares to pay the bills, or something called sequence of return risk. It’s peace of mind.
This is great content. Accurate and presented very well. Thank you.
Glad you enjoyed it!
I asked my financial advisor about the 4% rule. And he laughed. Saying that great if you wanna leave it all to your children. We didn't discuss it any further as I'm not ready to retire yet. In the UK the state pension will more than covet all my bills 😊😊
Jay says hi! Thank you for covering this very valuable topic. We need more truthful and clear information like this out there.
Hi 👋
Appreciate the balanced and informative view on the topic.
Thanks for watching!
Hey Erin,
With all this talk about the safe withdraw rate, it would be great if you had a video discussing different withdraw strategies. I know you had one on the 3 bucket strategies; but, maybe one on the guardrail strategies, or geometric spending rule? Just a thought.
is use the rhomboidal geometric spending rule
Great information Erin! Here is my two cents on this, Assumptions are only rough estimates not guaranteed, the withdrawal rate depends on all other factors such as the portfolio ratios, market performance, and inflation, its not fixed percentage, if we withdraw consistently with out taking all these factors into consideration then there is a possibility of loosing the networth drastically over a period of time
Thanks for sharing!
I always appreciate the clarity of Erin's presentations. The charts are also very helpful. In the first chart (non-inflation adjusted rate of withdrawal), I can see a few examples of where Dave's 8% withdrawal rate could make sense. For example, withdrawing at the 8% rate for the first 10-15 years (which the 1st chart indicates a very good chance of success) while holding off to start Social Security at age 70, and then drop your withdrawal rate to just fill the gap between Social Security and living expenses after age 70. Although I don't plan on withdrawing at the 8% rate, Erin's presentation provides a little more reassurance that we have wiggle room on the withdrawal rate that we do eventually choose.
Hi Erin
I’m leaning towards living off of my dividends in retirement. I should average about 6%
My parents used savings, SS and pensions to cover all expenses beyond the RMD.
I like that plan.
Good info, well organized and presented. I think I’ll go with 5% now. We have a financial planner at 1%, so I feel like I have go 5 % total
Bill Bengen asked a question that had little to do with retirement and most financial advisors use his answer to give poor retirement advice.
Bill's book has a number of tables. The most important ones show indicate how much money is left at the end of the expected life span. In the case of a 4% withdrawals from 50:50 distribution of investments the money almost certainly runs out at about year 32. Makes the last few years a bit concerning. The situation is much better for 100:0 (all stocks).
But the premise that retirement economics starts at retirement is just wrong. We have a long history of working and hopefully saving and investing for retirement. That is where the mistakes are made.
The question under discussion is how to avoid over-shooting: which in practice means either retiring much later than you could have or missing the opportunity to spend much more money in the early years of your retirement before you get infirm
I use what I call the Lean Years rule. That is for lean, poor market years like Rona virus when the market corrects like - 25% I would withdraw a lot less, say 85% of normal. It is almost natural, thus allowing me to set a w/d 6% target.
Is the grid at 1:56 correct? It seems some numbers are switched there? I would think if I am withdrawing more, I would need more money in the portfolio?
Great video. Once again you are spot on that your money should serve you. 😊
Yes! Thank you!
Why are still backing Dave Ramsey he’s flat wrong call him out for somebody that promotes money management and leadership qualities then on live radio throws his own employee under the bus is this quality you want in your CEO all you are being lead by the nose by wolf in sheep’s clothing
Informative and well presented🎉
Totally agree with flexible withdrawals.
I mean, you also may want to keep your principal so you have something to hand down.
This year I'm only taking 2%, but I'm meeting the amount I need to live on
With a planned large cash buffer and a relatively aggressive fund mix, I’m planning for 6%. On down years, I would opt for 0% to avoid selling at the bottom. But I’m still 8-10 years from retiring so I don’t worry too much about this today.
How large of a cash reserve would you need? I’m thinking 300k
@@dantheman6607 I’ve been thinking 250-300k too. I’m undecided to wait until late to quickly save this amount, or slowly over 8 years. 8 years is probably safer because you never know what the future brings. You?
@@HoustonTom Definitely will have a cash buffer to offset down years in the market. I’m 55 so cant think of SS yet, I’ll have a modest pension too so that will help. I’m thinking I’ll need at least a 200k cash reserve/emergency fund. 2022 showed us the importance of having a back up reserve outside the markets.
@@dantheman6607Since retirement in 2017, I've maintained a years expenses in no risk investments. That would weather me through the worst parts of most bear markets. There's also the downside that all that money is sitting around doing nothing for you. Although recently you can earn ~6% on that money.
@@dantheman6607My plan is 5 years of living expenses, which should get me thru any modern market downturn. In exchange first that, I plan to keep a high percentage invested in securities so my money will continue to compound about as much as it does now.
I feel that 4 percent is a little too conservative for most people. It's based on a worst case market performance and doesn't account for other sources of income like social security right? I think a 5 percent withdrawal rate is good to start with at least. The amount of social security and other sources of income will also determine a safe withdrawal rate.
Excellent video, Erin! So many factors and combinations to consider.
Thanks so much!
I think I'll be retiring around 50, and I plan to take a lower percentage (say 3%) when the market is down and a higher percentage (maybe 5% - 6%) when the market is up. I'm not a big spender and I don't see that changing later on in life.
I am 63, have a military and GS pension. I am using 5.5% withdrawal rate until I start drawing SS. At that point, I will scale down to 4%. 65% Bond, 25% Stock, 10% Cash (CD).
Daves advice is general based on a 12% return. Everyone is in a different boat depending on how they are invested.
Yeah, if you are investing in things that are legal 12% is a crazy number to use in calculations.
@@Iffy50 12% rules out bonds and index funds, on average. My 5 yr average on my IRA is just over 10% return (funds and stocks) and my brokerage account (all stocks) is not quite 17%. My 401K, a bond heavy target date fund, performed pooly for years then took a bath 2022---that sure wont cut it! Maintaining an average of 12% means cultivating good stocks and have a plan when the mind goes.
@@Iffy50it isn't necessarily that crazy. Far be it from me to defend Dave as I think he is a modern Christian scam artist who sells bad advice for a high price while hiding behind supposed values. But there are a lot of legal stable investments that can offer a 10%+ yield that people seem to ignore. BDCs, RIETs, and closed end funds are all required to pay a percentage of profits to shareholders, and the share holders pay taxes on those profits instead of the business. So if you own those inside of a Roth or something then you can pretty easily earn a 10%+ dividend with minimal risk to asset depreciation or tax concerns... But also not likely to have asset growth either. But if the goal is income instead of growth it is a good way to go.
A lot of rental properties and small businesses can yield 10%+ per year on cost with relatively low risk. The initial setup can be a growing pain and learning curve, but after a few years a steady 10% return would be a low expectation.
There are stock funds that provide options, or which trade volitility. Similar to BDCs, their value tends flat to slightly down over time and you loose tax advantages, but they can often pay a consistent 15%+. So again, if cash flow is the goal, it isn't a bad way to go.
A lot of dividend investors calculate dividend on cost, and it is crazy to see how even 2% dividends can yield 20% on cost after a decade or two of dividend increases. The real time dividend may still be a mere 2% on cost, but over time you get asset appreciation, and dividend growth that seems impossible until you run the numbers. It isn't going to be 10%+ on cost overnight, but over time the rate of return can be rediculous for what looks like a 2% dividend on paper. Dividend investing is awesome, and I don't understand why people down play it so hard when it offers such great results and significantly less volitility compared to traditional growth stocks.
But for general stocks and bonds... No way a 12% average return is considered normal, or where an 8% withdraw is reasonable. That is crazy talk, and dangerous for Dave to suggest doing without a lot of context!
My 401k runs well over 12% most of the time but, have to be cautious about years like the 80s.
sequence of return risk is not being considered in daves 8% advice - its horribly irresponsible to ignore or worse be ignorant of this market risk - AVERAGE returns dont mean shit if you retire into a lost decade - you wil be financially ruined - period.
I waited until I could live on pensions, interest and dividends that way my kids can divide the left overs. It’s nice to be care free.
Bill Bengen did an exhaustive study and came up with the 4% rule in 1993, although he didn't coin the phrase. What he found was a withdrawal rate of 4.15% NEVER failed in a 30 year retirement.
Depends where you live. I am British but i have lived in Canada for the last 15 years and plan to retire here. Both the UK and Canada have great social healthcare so that is not an issue for me in retirement. Also it depends what other income you have. I willl have 2 defiined benefits pensions from the UK and a full state pension. In Canada. I will get about 60% of OAS and CPP which are government pensions. That is 5 sources of guaranteed income for life. Akso i have a substantial RRSP which is equivalent to 401k which i intend to draw down early before my government pensions start. My buffer will be my tax free savings which is not considrereed as income from my TFSA which is like IRA.
Remember, when you pass, the government are going to want their tax back so will take at least half of what you have left but cant touch what is in your TFSA / IRA
The amazing thing is how pathetic a 4 percent rate of return is. When one looks at all the hype the investment sales community pumped at us even a 6 percent withdrawal rate being " excessive" would looking backwards mean that all the rate of return they claimed and suckered our money into the mutual funds etc really constituted fraud.
That's because their number one interest isn't your well-being. 😂
Keep in mind its a 4% withdrawal rate if your expenses increase with inflation. So if we are assuming a 2-3% inflation then this really means you are supposed to be averaging 6-7% returns to be safe.
One of the most sobering questions that you ask yourself when you are planning your retirement is "Just how much longer do you think that you will live" - that is - how long will you need your money to last. While I won't be facing RMDs until next year, I have been using the RMD withdrawal rates as a guide. Its a sliding percentage withdrawal rate that increases as you get older and its base adjusts each year depending on the size of your portfolio which grows or contracts depending on market performance. The IRS has the RMD table calculated out past 100 and I figure that if I get that old, I'll be too delirious to understand - or care - anything about withdrawal rates.
I actually discussed this in the video I have going live on Monday. Originally it was planned to be today’s video, but then, based on what was the financial conversation on the Internet, I filmed this video and published it today instead 😊
I really appreciate your videos Erin.... Thank You!
I have a 60/40 portfolio that has returned an average of 6.75% in the last 10 years.
4% yearly withdrawal sound good to me. All depends on your portfolio and your basic needs.
I think the fact you have to plan on higher spending in the first 10 years you could probably so something like an 8% withdrawal rate and every 3 years you reduce it a percentage till you get to 4%. I think of my grandparents and they loved yo travel but by their mid 70s the travel they did nearly completely stopped.
One thing I have never heard a retirement channel discussing is the concept of rebasing. The 4% withdrawal rate method of guaranteeing your savings will last 30 years (using historical data mind and with a minimum 50% invested in equity) allows for yearly inflationary increases. Let us say that at any point in time your portfolio performs better than 4% plus accumulated inflation i.e. it grows in real terms. In that scenario you can rebase to take 4% (and in later years 4% plus inflation) on that higher sum and still have a 30 year guarantee that you won’t run out of money. In fact you can withdraw a higher amount still as it is less likely that you will live another 30 years from that point. Your portfolio doesn’t know the history of growth and loss, nor of your historical drawings. It is simply a value you have at that time and might have invested from scratch at that time for the purposes of applying the 4% rule. An example should illustrate. Let us say you invest $1m on retirement and for the first 5 years withdraw $40k per year, inflation adjusted. Let us say inflation over that period is 10% but that the market has outperformed the 4% plus inflation mark. Let’s assume the portfolio is worth $1.2m at that juncture. You can now withdraw $48k that year instead of the $44k you were originally planning, and $48k p.a. plus inflation thereafter (ignoring the fact that you might draw more if you are unlikely to survive the next 30 years). What if the portfolio value subsequently drops below that high point? You don’t have to reduce your withdrawal rate as market downturns are part of the 4% model. Simple.
Fabulous job as always
life expectancy is 76 if you retire at 65 you can do 8 percent. 4 percent is if you have 30 years. If you retire in your 40s 4 percent is good.
Thanks for this information
So most financial planner today plan for a retirement to 95… which is WAY over your 82, and 85 number… Which is right ? I dont know… but it makes a BIGGG difference in the plan…. planning for 95 is much more a better plan tho...
Erin exudes a calm common sense approach to this subject. Dave Ramsey getting overly agitated on this subject should be troubling to many, including his family.
Both numbers are only rough guidelines. Better to start with exactly how much do you need to pay your bills! If you need to withdraw 10% just to pay your bills, then you need to get a job in retirement! If you can pay your bills with some extra, in that 4-8%, with your life expectancy (realistically 15-20 years after 65 for male), start there but be prep'd to reduce during bad market years.
The correct answer: a dynamic withdrawal rate. Take what your investments give you on any given year. Your emergency fund is there to cover shortcoming on any down years.
I’m not a big fan of annuities but a 65 year old male can currency lock in a single premium annuity at 7.7% withdrawal rate
If longevity risk keeps you up at night maybe use social security and an immediate annuity to cover your minimum living expenses
I’m planning on using a 5% withdrawal rate and delaying social security until age 70
I stuck to RMD only, seems to work great!
Nice!
You should do a video specifically about Dave Ramsey's method when doing a flexible withdrawal rate (FWR).
My wife and I are 70ish. We’re maintaining roughly five years of cash spending equivalents and the balance in stocks. This gives us a 80/20 stock/cash portfolio. We’re currently spending about 5.5% of our total portfolio per year.
Five years? Sounds as if you're pretty rich.
@@tancreddehauteville764 Not really. If their annual budget is $50K a year, that would be $250K in cash and about $1 million in stock. That would be about a median retirement nest egg.
The “ideal rate of withdrawal” must, necessarily, take into account your remaining life expectancy, projected inflation, expected lifestyle, leaving an estate to your heirs, market volatility and expense risk, unforeseen costs. The “ideal rate” is a function of an actuarial calculation that takes into account that there is only one way to diversify for life expectancy, leaving an estate to your heirs.
Advice is just that: someone's opinion, and it should always be taken with a grain of salt. No two people's situations are the same, and therefore, no solution is always going to work exactly the same for everyone.
This was great and I learned a lot.
That makes me so happy to hear!!
Even an 80% success rate seems pretty good. You can always adjust as markets and inflation changes. As long as your budget is discretionary and can easily take out lower during down times.
Great video. I love your no-nonsense take on this, and I'm actually glad that this conversation is taking place amongst people right now.
Great overview. What would you suggest is someone never wants to reduce principal and leave a medium size legacy for their kids? Say somewhere around $1 million leftover?
This is a nicely done video on withdrawal rates and the factors that affect them.
So why not draw 4% in a bad year and a higher rate in a great year?
So 3% is pretty safe at any bad time. Isn't it?
True, but you have to save a gazillion dollars. Your heirs would like it!
am about to retire from the gov trying to find out what withdraw rate from TSP with less between 200.000 and 190.000
Well, the problem is that life expectancy is a bell curve, not a line in the sand, and few people enter retirement knowing precisely when they will die. So, we are forced to save and withdraw based on how long we "might" live rather than how long we are "expected" to live, or we risk running out of money. Planning for a 15-year retirement and then living to 95 could be a bit of a problem, and a scary one at that. Someone who wants a high withdrawal rate should probably consider adding a simple income annuity into the mix, as it is the only way to protect against longevity risk aside from over-saving and under-spending (or moving in with your kids).
Good point, but another strategy for a couple is to ensure one high SS Check for the survivor. In today’s dollars that would be $3-4k per month.
Our survivor check will be $4500, and we have a small longevity annuity. So we are planning on spending our portfolio over 20 years with a 5-7% WDR. Owning your primary residence also helps. Both our mom’s are 87 and “survive” on about $2300/mo with no portfolios. An extra $1000 and they would be ecstatic.
Great video!
As a person gets closer to retirement, transitioning from growth funds/etfs to dividend funds, allows for less volatility without getting nowhere with bonds, but having income without having to sell as many shares from the portfolio. Having a 5-6% dividend rate, which is easily achievable, combined with social security, should be more than enough to keep up with inflation and provide a comfortable lifestyle in retirement without worry and stress.
8% is not on my radar. I'm 68 and will take out closer to 4% unless there is a stellar year in my investments. Fear of running out of money.
th-cam.com/video/Hhg6dB2UcAs/w-d-xo.html
That fear is reasonable, Dave's great at helping people eliminate debt and start saving their nest egg, but his quoted rates of investment return and sustainable withdrawal rate are misleading, imo. Yes, historical actual rates of return are factual, but what folks actually GOT is always lower, cause they do stupid things along the way (sell low and buy high). So you're not getting the return he's planned for you AND you're not making it to the end of your life with all your money by blowing 8% evey year (see above link by math nerd who actually makes a living in finance, vs what Dave does, essentially entertainment/education). Oh, btw, I always question why people think taking MORE money out in good years is sustainable. Do you take less money out in bad years to balance that? If not, then haven't you lessened your sustainability?
that is a great video. a lot of retirees talk about the 4% rule without really knowing much about it and get scared when hearing about how you can draw higher rates rather than 4%.
I tend to view three or 4% as the absolute minimum, the truth of the matter is most people can withdraw at a greater rate than that, and still have a successful portfolio
@@ErinTalksMoney i retired at 55 in 8/21 with 95 equities/5 cash and since then have gone through the cash except for a small amount. i am drawing 3% annually first 2 yrs but at the start of the 3rd yr i gave myself an inflation adjustment 1 yr delayed. only drew 3% intitially due to age of retirement, 100% equities as well as legacy issues. so far 3% is adequate for our needs but i will increase it later and may use 4% vs guyton klinger at 5% closer to 60 y/o.
@@Random-ld6wgDon't forget you will likely be able to drastically reduce that when you take Social Security. Sounds like you are on a safe conservative course.
@@hogroamer260 i plan to take it at 70 y/o (2036) so i hope i still get 100% of what is promised instead of 70%. i still have 4 yrs on my mortgage that i am paying with my 3% draw so i get a 20K raise in 4 yrs.
Can we go with conditional withdrawl rates, something like:
6% if your holdings are up more than 15%
5% if your holdings are up 10-14%
4% if your holdings are up 7-9%
3% if your holdings are up 4-6%
1% if your holdings are up 1-3%
0% all else
There you go!
Your holdings will vary depending on when you started investing. If you started investing 35 years ago and never sold your positions, it wouldn't be crazy for most of your holdings to be up 5,000% over the lifetime of the holdings. Thats the power of compounding growth.
@@zackcinq-mars2129 Going with 35 years is 50x reasonable?
It's reasonable to assume you might double every 8 years. That's a 9 % compounded return.
So in 35 years you would be between doubling 4 times and doubling 5 times.
Mathematically, that would be between 16x and 32x. So 50x would have to be getting substantially better than the market. You'd have to buy positions in MSFT in 1986, AMZN in 2010, or similar. Not impossible, but not the likely outcome either.
Some good points here. Something you overlooked: the 4% withdrawal rate assumes that bonds will perform they way they used to. That is, decent performance, low volatility, and low correlation. All three assumptions have proven false. They perform worse than cash, highly volatile, and highly correlated with the stock market. Meanwhile, there are much safer ways to invest in the stock market than in the past. Lower fees, better diversification, and ways to scale your investment more precisely to the level of appropriate risk. This makes it possible to go in harder on stocks and eschew bonds altogether, getting better performance AND lower risk. So, we can do better than 4%. I'm sticking with 4% since I retired early, but 5% is fine for most people. 8% is silliness.