Can You Realistically Follow Dave Ramsey’s 8% Retirement Rule?
Famous radio show host and financial guru Dave Ramsey doesn’t seem to mind taking a contrarian view on personal finance . So he probably wasn’t surprised at the pushback he got for proposing an 8% retirement rule rather than the more conventional 4% retirement rule.
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In fact, just to double down, Ramsey recommended that retirees invest all of their assets in equities and then withdraw 8% a year of the portfolio’s starting value, with each year’s expenditures adjusted for inflation. For example, if you have a $500,000 starting portfolio, you would withdraw $40,000 in Year 1. If inflation is 3%, you would withdraw $41,200 in Year 2, $42,436 in Year 3, and so on.
The idea is that the typical stock market return of around 10% to 11% a year will cover your 8% and the inflation. That’s much different than the 4% rule, which recommends that you spend no more than 4% of your investments during the first year of retirement and then adjust the total every subsequent year to account for inflation.
But what about when there are rumors of recession and the market is feeling more and more volatile? Let’s explore.
Many Americans Likely Can’t Afford Ramsey’s Retirement Rule
Like any financial rules, the 4% or 8% rules don’t apply to everyone. It largely depends on your financial situation, risk tolerance and lifestyle. In the case of Ramsey’s 8% rule, the assumption is that you have amassed a big enough nest egg that you can pull out at least 8% a year for many years, which unfortunately is not the case for everyone.
The problem is, most Americans do not retire with a large nest egg. Many economists throw out recommended or conventional retirement fund numbers, like having $1 million saved. Though that does sound ideal, it is simply not applicable for many people.
To put this into perspective, here are some current average retirement savings statistics:
The 8% Retirement Rule May Be Possible (If You Retire Later)
Even if you have a fairly large nest egg, the 8% rule probably works best if you retire later in life, such as in your 70s, which shortens your life expectancy in retirement. This will also increase your monthly Social Security check.