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Safe Withdrawal Rates: Stealing Hope or Creating False Hope? Thumbnail

Safe Withdrawal Rates: Stealing Hope or Creating False Hope?

Insights Retirement Planning Investing Stock Market Financial Planning

Personal finance radio personality, Dave Ramsey, ruffled some feathers not long ago with a rant about safe withdrawal rates.  His claim:   You can rely on an 8% withdrawal rate in retirement.  Is this dangerous advice or are nerdy financial advisors like us stealing your hope for retirement?  

Watch Now:  Safe Withdrawal Rates: Stealing Hope or Creating False Hope?


0:00 - Intro
 0:40 - Dave Ramsey's idea of a "safe" withdrawal rate
 1:44 - Unrealistic expectations
 4:52 - Real Life Experiences with higher withdrawal rates
 5:43 - What if future returns are less than historical averages?
 8:53 - Stealing hope or creating false hope?
 10:21 - Outro

Dave's Rant

A caller to Dave's show on November 2, 2023, asked Dave about some research on safe withdrawal rates.  This question struck a nerve with Dave.  He went on a rant, telling his audience:

  • Long-term results for the S&P 500 are close to 12%
  • Historical inflation has been close to 4%
  • If you are using "good" mutual funds and "getting 12% per year", you need to leave 4% in your account to account for that.
  • He is comfortable using an 8% withdrawal rate,
  • If you have a $1,000,000 you should be able to generate $80,000 of income each year, in perpetuity.
  • When confronted with academic research, Dave dismissed that as "stupid."

Here is a link to his rant if you want to watch for yourself

This is just stunning to us.

The Big Problems With This Guidance

There are some major problems with this guidance.  

Viewing the investment markets in the context of "average returns" creates challenges.  First, real-life results show that "average returns" rarely happen in a given year, if ever.  Returns also have significant volatility.  One year will be wonderful (like 2021), and the next year could be incredibly bad (like 2022).  And we never know in advance what the year will hold for us.

We have concerns about the accuracy of the statistics being used in this rant.  When looking at the long-term average returns of the stock market (calendar years since 1925), the long-term average is closer to 10% per year.  

Perhaps the most short-sighted part of this guidance is ignoring the human side of his advice.  Most people struggle with the negative volatility of the stock market.  As a result, asset classes with less downside are often used to reduce the impact of those big swings to the downside. Those asset classes also have lower average returns.  To generate "average" stock market returns, you have to be 100% allocated to stocks.  And we meet very few people who can stomach the roller coaster ride associated with that allocation.

Real-Life Experience

Near the end of the late 1990s, the idea of a "safe" withdrawal rate started to move to 6% per year.  From 1995 to 1999, the stock market had one of its best 5-year periods ever.  Each year generated returns of more than 20%.  Terms like a "new normal" for investment returns crept into the headlines and lingo of the stock market.  Then it all fell apart.  

The 3-year bear market was a harsh dose of reality for retirees.  Using a 6% (or higher) withdrawal rate created a disastrous result for retirees.  Without adjustments, those higher withdrawal rates eroded account values.  In some cases, people were forced out of retirement and back into the workforce.  Many had to make significant adjustments to their lifestyle and spending habits.

Periods like 2000-2002 are not common.  But they are always a possibility, and it needs to be accounted for. 

Using History Can Create Unrealistic Expectations

From 2009 to 2021, the stock market had an incredible run.  It was one of the strongest bull market runs recorded.  Even when you add the dismal results for 2022 (-18%) and the recovery in 2023 (+26%), the average since 2009 has been roughly 14% per year.  If you create your expectations based on that period, you could easily assume a higher withdrawal rate would be acceptable.  But when you look at much longer time frames (98 years), the stock market has averaged much closer to 10% per year.  

What happens if future returns are less than the historical averages?  Investment departments at firms like BlackRock, Vanguard, and JP Morgan, all release their capital markets expectations.  Here is a summary of what their expectations are over the next decade.

Stock Market Returns Bond Market Returns
Vanguard (link) Between 4 and 6% per year Between 4% and 6%
BlackRock (link) Approximately 5% per year. Between 4% and 5%
JP Morgan (link) Approximately 7% per year Approximately 5%

Real-life results will be better or worse than what these firms are projecting.  But the key take away - none of these return expectations over the next decade are over 8%. 

Stealing Hope or Creating False Hope?

Most of our team is pretty nerdy when it comes to the number part of retirement planning (and none of us live in our parent's basement).  We also tend to be conservative in our approach to planning.  If investment results are better than expected, most people are going to be just fine.  We are more concerned about the other side.  If returns are worse, we want to help you avoid a catastrophe.

If you would like to discuss what your hope for retirement is, reach out to us.  

Appearing in this Video

Vince McManus

Vince McManus is a financial advisor in Parkersburg, West Virginia.

Neal Watson is a financial planner in Marietta, Ohio.

Neal Watson, CFP®