Subtitles section Play video Print subtitles 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
B1 US withdrawal fund inflation portfolio safe dave Is an 8% Safe Withdrawal Rate... Safe? 19 0 VM3 posted on 2023/11/24 More Share Save Report Video vocabulary