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  • Dave Ramsey recently claimed that an 8% withdrawal rate

  • from an investment portfolio is safe for retirees

  • safe withdrawal rates

  • estimate the percentage of a portfolio that

  • can be spent in the first year

  • and then adjusted for inflation thereafter

  • without a material risk of running out of money

  • Dave's logic

  • is that good mutual funds return around 12% per year

  • and inflation has averaged around 4%

  • for the last 80 years

  • this leaves 8% to be spent by the retiree

  • unfortunately

  • the logic is flawed

  • and retirement spending math does not work this way

  • good mutual funds are hard to find before the fact

  • so the idea that you can

  • easily pick a market beating fund

  • is a flimsy Assumption

  • the best performing funds

  • historically do not tend to go on to be

  • the best performing funds in the future

  • a similar comment can be made about country returns

  • Dave references the performance of the

  • S&P 500 as being a little below 12% but again

  • the phenomenal historical performance of the S&P 500

  • does not mean that future returns

  • for US stocks will be similarly high

  • it would be far more sensible

  • at least in my opinion

  • to use return experiences of countries around the world

  • to gain an understanding of possible return scenarios

  • in planning for retirement

  • when you do this

  • the safe withdrawal rate is closer to 3%

  • or even a little lower

  • even if we could find a fund that does return 12%

  • on average it

  • would not sustain an 8% withdrawal rate for

  • the simple reason that stock returns are not constant

  • that 12% average return will consist of lots of

  • big ups and downs

  • and inflation

  • also goes through higher and lower periods

  • constantly spending an inflation adjusted 8% of

  • the initial portfolio during consecutive down years

  • or having to keep up with years of higher inflation

  • without offsetting higher returns

  • can deplete a portfolio quickly

  • let's take a mutual fund that has returned about 12%

  • per year since 1935

  • The American Funds Investment Company of America

  • it returned

  • 11.73% annualized from 1934 through October 2023

  • which is incredible

  • now as a side note

  • despite its incredible long term track record

  • this fund has trailed

  • the US market for more than 20 years

  • as of today

  • you can't buy past performance but anyway

  • using this fund's historical performance to test

  • an 8% withdrawal in the first year

  • followed by annual inflation adjustments

  • so a constant

  • real $80,000 in spending on a million dollar portfolio

  • over a 30 year period

  • yields a success rate of a little more than 50%

  • this means that in around 50% of simulated trials

  • you ran out of money before

  • the end of the 30 year withdrawal period

  • I don't know about you

  • but I would not call that safe

  • at a 5% failure rate

  • the safe withdrawal rate for this fund

  • which we know has a great historical track record

  • would be about 4.6%

  • come on Dave be better

Dave Ramsey recently claimed that an 8% withdrawal rate

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