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Retirement Planning > Spending in Retirement > Income Planning

How the Ramsey vs. ‘Supernerds’ 4% Spat Helps Retirees

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What You Need to Know

  • Dave Ramsey sparked an uproar by arguing that retirees should invest and spend much more aggressively than researchers suggest.
  • Some well-known financial planners criticized the national personality's argument for 8% withdrawals and a 100% stock allocation.
  • Income experts hope that the ongoing debate will focus attention on the complex and evolving issues tied to retirement spending.

Dave Ramsey has done financial advisors a favor by bashing the conclusions of several retirement experts about “safe” withdrawal rates, two veteran financial planners say

The uproar around the provocative planning personality’s controversial advice to withrdaw 8% of retirement assets a year has drawn attention to the need for tailored retirement spending approaches for clients as planners have jumped into the conversation.

During a recent podcast, Ramsey blasted retirement spending researchers, calling them “supernerds” and “goobers” who “live in their mother’s basement with a calculator.” 

Ramsey went on to argue that the industry’s traditional 4% withdrawal rule (and more recent income planning strategies that utilize dynamic guardrails to control spending) is overly conservative and fails to fully leverage the power of the stock market.

Rather than depending on carefully calculated spending strategies that are revisited and adjusted over time, he suggests a 100% stock portfolio and 8% annual withdrawals. 

The assertion may fly in the face of the typical fiduciary financial professional’s perspective, but it also provides financial advisors with an entry point for deeper planning conversations with their clients and prospects.

That is, advisors can demonstrate exactly what Ramsey fails to discuss about sequence of returns risk, the growing challenges of longevity and the dangers that are presented by relying on overly bullish market predictions. 

This was the consensus of a number of financial planning experts who were asked to weigh in on the Ramsey vs. “Supernerds” debate, including Bryn Mawr Trust’s Jamie Hopkins and Morningstar’s John Rekenthaler. 

While he understands his colleagues’ skepticism about Ramsey’s 8% spending argument, Hopkins tells ThinkAdvisor he is actually much less skeptical than others may be, and he cites his deep engagement with the latest planning research as the cause.

As Hopkins explains, the real reason there can be so much debate about retirement spending strategies is that there is “actually no single right answer on this topic, and the spending question is more of a true debate versus a question of what is right or wrong.”

Ramsey’s Views & Trio’s Response

Ramsey, for his part, argued that the safe spending figure is actually around 7% or 8%, a viewpoint based in large part on his simultaneous assertion that many retirees would be better off with a 100% stock allocation as opposed to a traditional 60-40 or even 50-50 mix of stocks and bonds. 

Both the traditional 4% withdrawal rule and more recent spending guardrails frameworks use these “safer” asset allocations, and Ramsey further argued that such a “pessimistic” investing and spending approach could lead many people to believe that they can never afford to retire.

Taking to LinkedIn, the retirement researcher Wade Pfau suggested that Ramsey’s perspective may sound rational to the typical novice investor, but the reality is that he is speaking from the position of a total returns “extremist.”

“If that’s your thing, then more power to you,” Pfau wrote. “But he is suggesting a very risky approach to retirement income, and not all his listeners will understand the risks they are taking with an 8% withdrawal on a 100% stocks portfolio.”

Beyond his comments on social media, Pfau was one of a trio of self-professed supernerds who responded to Ramsey’s call-out in a widely circulated ThinkAdvisor commentary piece. In it, Pfau argues alongside Michael Finke and David Blanchett that Ramsey’s position dangerously overlooks that the sequence of returns risk is real — and it’s a big part of what makes retirement income different from pre-retirement wealth accumulation.

What Planners Are Saying

Among the dozens who responded to the “supernerds” kerfuffle on social media was Roger Whitney, a certified financial planner and founder of the Rock Retirement Club.

“I’ve met [the supernerds] and think they are intelligent, wonderful people,” Whitney wrote. “The debate is, what is a safe withdrawal rate? 8% over 4%? This is an academic question.”

As Whitney and many others emphasize, sound retirement planning isn’t based on any single metric, whether that is a safe withdrawal rate or any other figure.

“No one creates a plan and sticks to it throughout retirement,” Whitney argues. “Goals and markets are messy. Heck, life is always messy. The one constant I’ve seen in walking with retirees is CHANGE. Some are predictable, but most are not!”

Whitney adds that the “supernerds” are correct in advocating for flexibility and some measure of caution in the income planning process, given just how high the stakes are for any given individual or couple. Failure, in this planning context, can mean that aging Americans run out of money to fund their lifestyle at a very vulnerable time in life, when returning to work or reducing spending can be difficult or impossible.

“Changes in goals, circumstances, markets, interest rates, etc., all happen randomly,” Whitney warns. “Ultimately, it doesn’t matter whether a retiree starts with an 8% or 4% withdrawal rate. What matters most is having a sound process faithfully followed to make little adjustments as life unfolds. The uncomfortable truth is there is no answer.”

More Skeptical View

A similar point of view was shared by Morningstar’s John Rekenthaler, director of research, in an in-depth response posted to the firm’s website and in supplementary comments shared with ThinkAdvisor.

“This is not much of a ‘debate,’” Rekenthaler suggests. “As my article states, Ramsey’s argument is based on the doubly false assumptions that stocks reliably return 11% to 12%, and that only average returns matter for portfolios that are funding withdrawals. In fact, as we all know, stocks have prolonged stretches where they make much less than that, and volatility strongly damages the ability of portfolios to survive under such circumstances.”

As fleshed out in his article, Rekenthaler says the tendency for failure with Ramsey’s approach is clearly demonstrated by the supernerds, but for the sake of argument he goes on to ask when such an approach could actually work. According to Rekenthaler, the “only obvious way to withdraw aggressively from an investment portfolio without depleting it is to die early.”

“While generally not regarded as a desirable solution, expiring quickly does permit retirees to follow Ramsey’s advice,” he writes. “Even with Morningstar’s conservative assumptions, investors can safely withdraw almost 10% annually, inflation-adjusted, over a 10-year period. Easy pickings.”

Rekenthaler says this response sounds glib — “and it is” — but the underlying point is serious.

“The only reliable method for achieving a safe portfolio-withdrawal rate that is also satisfyingly high is to assume a short time horizon. Otherwise, something has to give,” Rekenthaler warns.

Drawing a similar conclusion to other commenters, Rekenthaler says that the biggest reason retirement portfolios crater are “slow starts” coupled with excessive early withdrawals. These two forces can quickly wreck an otherwise sound income plan, whether it starts from a 4% withdrawal rate or something higher.

‘Performance Art’

Stepping back, Rekenthaler says he views Ramsey’s statements as “performance art.”

“Which, to judge from the size of his audience, he does very well,” Rekenthaler says.

“Are Ramsey’s comments helpful? Maybe,” he continues. “They certainly are not helpful for retirees with long time horizons who take his advice to heart. But I wonder how many really do? Somehow, I just can’t see many 65-year-olds saying, ‘Yes, good idea, I will put all my money into equities and spend aggressively.’ I would guess that even Ramsey’s audience realizes that he is playing a part.”

As Rekenthaler and others conclude, the silver lining in this entire discussion is that Ramsey has brought attention to a set of complex and evolving issues relating to withdrawals from portfolios and funding retirement spending.

“If you listen to Ramsey’s statement, you will realize two things,” Rekenthaler writes. “First, nobody has ever been as certain of anything as Ramsey is about the accuracy of his counsel. … Second, he is deeply wrong. His argument relies on the overwhelmingly false assumption that stocks will consistently and regularly deliver double-digit returns.”

A Supportive Take

Asked for his perspective on the matter, Hopkins, the director of private wealth management at Bryn Mawr Trust, told ThinkAdvisor he was not surprised to see so much debate and discussion on social media.

“I think this situation underscores a few things, starting with the fact that Dave Ramsey has a huge following,” Hopkins says. “He is one of the more influential people out there in the world of planning and financial services. So, when he speaks, a lot of people listen — both advisors and consumers.”

As Hopkins notes, one can look back in the historical record and see that there have indeed been time periods during which an 8% starting withdrawal could have worked. There have also been times when even a 4% annual distribution would have been risky.

“As others have noted, 8% is not a super safe starting withdrawal level, but if you get into the details and you assume, for example, that a person will use their home equity and that they will have a pension to complement their income, 8% can be a good place to start,” Hopkins says. “It also obviously matters a lot what happens with the markets early in the retirement period.”

Hopkins says the experience of people who retired early in the last decade shows this is true.

“These people were lucky enough to retire into a period with essentially no inflation and very consistently high stock market returns during that retirement red zone where sequence risk is the most concerning,” Hopkins says. “If you look at the numbers, withdrawing something like 6% to 8% of the portfolio during this period might very well have been a sustainable rate.”

The key thing to realize, Hopkins concluded, is that people should (and in fact do) revisit and evolve their spending approach over time. Additionally, portfolio depletion late in life may not be such a bad thing as people assume.

“There is an argument to be made that it is perfectly rational to take those 8% withdrawals in order to have a higher standard of living for the first 15 or 20 years of retirement,” Hopkins said. “When you actually work with that elder client group, they tell you this. They say yes, you should absolutely live that best 15 or 20 years you can. Otherwise, the portfolio is just going to be depleted by health care at the end of your life, anyway.”

Pictured: Dave Ramsey


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