"There is nothing more hateful than bad advice”
Dave Ramsey: Bad Advice for Retirement
Dave Ramsey is a successful radio host and book writer – who has parlayed his success in those areas to a sprawling business empire - primarily focused on helping families get themselves out of debt.
I’ve listened to his radio show many times over the years. While I agree with the majority of the things Dave teaches in his show/books, there is one area that has always stuck out to me as curious. It’s his investment advice .
Dave advocates ideas regarding investing that are anathema to my experience, education and finally - common sense. Those things in no particular order:
- Retirees should be invested in a portfolio with 100% stocks.
- As an investor you should expect markets to provide you with an average annual return of 12 percent.
- You should invest your money in a combination of “growth stock mutual funds”
- You should be able to take 8 percent of your portfolio out annually during retirement.
This advice always struck me as curiously naïve for someone who put themselves out to the public as a “personal financial expert”. I’ll address each of these but spend a little more time on #4 – which I consider the most problematic…
#1 100% Stock portfolio: Every family is different – and hence making blanket allocations is cavalier bordering on arrogant. Many families are not emotionally or financially in a position to withstand the volatility associated with a portfolio which could be down 20 percent one year and up 25% the next (much less down three straight years)!
#2 Expect 12% Returns: Since 1928 (the first year we have clean financial data) the market’s average return is less than that (9.48%). In addition, over the last 40 years markets have been abnormally juiced by interest rates going lower. Most market strategists predict returns from markets to be much lower (mid-single digits) going forward. What does Dave know about 12 percent returns that they don’t?
#3: “Growth Stock” Funds: The ONLY area of the U.S. markets to provide 12 percent returns since 1928 is not growth – it’s VALUE. Suggesting investors invest in growth only would mean they need to take a serious haircut - reducing the 9.48% returns of the market’s return since 1928.
#4: 8% Distributions: In a recent video, Ramsey blasted his co-host financial advisor who told an investor to take less than 8% distributions. Ramsey called the advice “idiotic”, “moronic” and “goober” (whatever that means). It was a condescending and emotional response. It made my wonder if Dave thinks that since he’s been successful financially that he is right about anything he deems worthy to pontificate on. In this case, a co-cost who has more knowledge and experience and the temerity to disagree with Dave was a victim of his wrath!
In retirement distributions, Dave is out of step with Nobel prize winning economists, academic research, historical returns, expected returns, asset class returns, sequence of returns math and finally, common sense.
Dave has been much more successful in his personal finances than all but very few. However, I’d suggest an unwillingness to defer to experts (clearly Dave is not) is the very definition of arrogance. In addition, it’s dangerously false hope for those who may think they have saved “enough”.
Bottom line: Dave has done a lot of good helping families get out of debt – for which I give him the enormous credit he is due. However, his advice on investing generally and 8% annual distributions in retirement is reckless.
As I tell my family: when dealing with important aspects in your life – listen to experts and hire them if possible! Don’t try to build a home by watching YouTube videos, don’t get legal advice from Google, don’t attempt surgery on yourself and in the case of retirement distributions – don’t listen to a guy who has never worked in a domain where he disagrees with all the domain experts. Hire an experienced financial advisor who is a fiduciary and has helped many successful families manage and distribute assets during their retirement years.