Ramsey’s 8% Retirement Rule Sounds Nuts At First

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

• In a market downturn with limited recovery time, a 100% stock allocation in retirement carries significant risk.

• The 8% withdrawal rate is much higher than the commonly recommended 4% withdrawal rate.

• If you’re thinking about retirement or know someone who is, three simple questions are making many Americans realize they can retire sooner than they expected. Take 5 minutes to learn more here

Financial expert Dave Ramsey has a lot of unconventional ideas. For example, he believes that you don’t need to care about your credit score at all, that you should avoid debt at all costs, and not even use credit cards as a tool to earn rewards. Many financial experts strongly oppose these ideas.

Ramsey has also taken a stance that goes against conventional wisdom on retirement.

Specifically, Ramsey believes that as a retiree, you can choose a withdrawal rate of 8%. That’s at least twice as much as conventional recommendations, but Ramsay has some reason to believe it’s the best option.

Deciding how much money to withdraw from your retirement and investment accounts is one of the biggest decisions you’ll make as a retiree. That’s because if you withdraw too much, your retirement account will be depleted and you’ll still need the money. Since Social Security only replaces 40% of your pre-retirement income, you could find yourself really in trouble if your account balance drops to $0 and you can no longer live off your savings.

Conventional wisdom holds that a key way to avoid emptying your account too quickly is to insist on withdrawing 4% of your account balance. This rule is often called the 4% rule, and experts initially predicted that if you followed it, you’d have about a 90% chance of having your money last at least 30 years into retirement.

Ramsay, however, took a very different stance. He believes you can withdraw 8% of your account balance each year.

If you need to take more money out of your account to fund retirement, or if you feel like you can’t use your savings to enjoy life as much as possible, choosing a higher withdrawal rate can be very attractive.

However, Ramsey’s advice comes with a caveat. He thinks you should choose an interest rate of 8% only If you invest your entire portfolio in stocks.

In theory, Ramsey’s 8% rule might make sense. After all, the S&P 500 has generated an average annual return of 10% over time. If your investments generate 10% per year and you withdraw 8%, your money should technically last until your retirement.

There are some very big problems with this premise, though.

On the one hand, an average annual return of 10% is a average. Your investments may not earn 10% every year, and there may be some years when you lose money. This isn’t a big deal if you keep your withdrawal rate low, since you don’t expect your account to grow every year to allow you to make such large withdrawals.

Another big problem is that if you invest 100% of your portfolio in stocks as a retiree, you’re taking on a huge amount of risk. When you get older and retire, you’re going to have to withdraw money from your retirement accounts—either because you need the money, because minimum distribution rules require you to take a withdrawal, or both.

If your entire portfolio is in stocks and you have a few bad years, you could suffer huge losses that you won’t have time to recover. When you have to withdraw your money at a bad time, you may be forced to lock in a large loss. As a retiree, this is simply not a smart way to manage your portfolio.

Your life will be better and your future will be safer if you:

• Follow the general guideline of subtracting your age from 110 to determine what percentage of your portfolio is devoted to the market

• Follow the recommended 4% withdrawal rate.

Of course, if you want to invest more aggressively or withdraw more money each year, you can also talk to a financial advisor about developing a personalized retirement and withdrawal plan – but before you follow Ramsay’s advice and end up regretting it, you should get professional advice.

Most Americans vastly underestimate how far they will need to retire and overestimate how ready they are. But data shows that people who have a habit will have more than double Savings for those who don’t.

No, it has nothing to do with increasing your income, saving, cutting coupons, or even reducing your lifestyle. It’s simpler (and more powerful) than any of them. Frankly, it’s shocking that more and more people aren’t adopting this habit, considering how easy it is.