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# Why Dave Ramsey's Math Is So Scary

January 6th, 2013 at 08:24 pm

I like to periodically re-read various personal finance books. Over this weekend, I just finished re-reading Dave Ramsey's "Total Money Makeover".

A few weeks ago, I shared my Excel calculations on the possible size of my nest egg at retirement age, assuming different scenarios. Here are my projections using Dave Ramsey math:

My traditional and Simple IRA balances as of 12/31/12 total \$141,313.40. If I were to re-allocate that money based on Dave Ramsey's advice and assume I can count on 12% returns from now until age 65, my nest egg will reach \$1,217,098.64 without my adding another single penny.

Currently, I am aiming for 600k in those accounts so that I can draw down 24k per year (standard safe withdrawal rate of 4%). But, Dave Ramsey says 8% is a safe withdrawal rate. So if I follow his advice, I only need 300k to safely draw down 24k per year.

Well holy cow, I am already looking at a nest egg of 4 times that amount without adding another penny between now and age 65. I will be able to count on my nest egg being 1.2 million, and I will be able to count on safely drawing 96k annually from my 1.2 million nest egg. I only make 49k per year now, so to me that is a fortune! Conclusion: I am golden. I have no need to continue adding to my traditional or Simple IRAs. I should immediately begin doing something else with the money I have been directing towards my traditional and Simple IRAs.

What about my Roth? I need to re-allocate that to 100% stocks too. The \$15,295.50 I had on 12/31/12 will grow to \$131,736.50 by the time I reach age 65 without adding another penny. My goal is 150k, so this is a little bit short. However, the whole reason I am saving in my Roth is to have a fund to pay for large irregular expenses such as a new roof or a new (to me) vehicle. But if my income is 96k per year, I don't foresee having any trouble paying these expenses out of current income. I will have twice the income I have now and no longer be saving for retirement or paying Fica taxes, so surely I can come up with 10k to buy a nice used car. I won't even need to dip into my 131k Roth. In fact, I don't see why I need money in a Roth at all.

Conclusion: I have already salted away far more than I need. I am done saving for retirement.

So I stop saving now and arrive at age 65 with...substantially less than Dave Ramsey promised me. Then what? Well, adjust to a much lower standard of living than I had expected. It's too late to do anything else.

It is a good thing for me that I recognize the huge flaws in Dave Ramsey's investment math. I hope that those following his advice are able to recognize the flaws too, but I fear that many are not.

### 4 Responses to “Why Dave Ramsey's Math Is So Scary”

1. Carol Says:
1357510327

You are right--his investing advice is terrible. I cannot imagine any scenario where an investor has earned a 12 % return on average for the period of the last 14 years. Only invest 100% in stocks if you are willing and able to lose 50% of that money. And 8% withdrawal rate? Scarey! Stick to your sensible ways, Petunia!

2. MonkeyMama Says:
1357510640

Ugh!!

3. Shiela Says:
1357517932

I've read a lot of personal finance book but have never read DR, but I feel like I know a lot about his book already though. I never like his advice about paying the lowest amount of debt first.

Everytime I read any personal finance book I always just take what I think is sensible advice. I think assuming a conservative return in investment is the best way.

4. Andy Says:
1361864487

Can you imagine another 2001-2003 scenario where the market drops 20% every year for 3 years? You would go from \$1.2 million in 2000 to \$864,000 in 2001 to \$622,080 in 2002 to \$450,000 in 2003 (decline of 20% and withdrawing 8%). Your 8% withdrawal amount would drop from \$96,000 to about \$36,000. That's only if you adjusted your withdrawal every year. If you had to withdraw \$96,000 you would be significantly worse off. Sure, that's the worst case scenario, but that is exactly what we should be planning for. His advice on investing is not scary, but outright negligent.

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