Radio host and author Dave Ramsey has developed a big following by delivering basic advice about financial literacy and budget management. He has helped a lot of people take positive steps to get out of debt and invest for their future.
But recently, he’s being called out by many members of the financial advisor community — particularly across social media channels — for suggestions about investment returns that are overly optimistic.
This New York Times blog outlines Ramsey’s problematic assumptions: http://bucks.blogs.nytimes.com/2011/05/13/dave-ramseys-12-solution/?partner=rss&emc=rss
Ramsey has suggested in many formats that investors can expect 12% average annual returns from investing in U.S. large growth stocks. Because a 12% return would compound so nicely that a tremendous nest egg could be grown over a working career, Ramsey also suggests than retirees may afford to withdraw as much as 8% of their savings each year and not worry about running out of money.
The average return of the Russell 1000 Growth Index over the past 15 years has been 5.47%. 10 years, 1.62%. If you stretch the averages back to the 1920s to even out the highs and lows, you still wouldn’t get to a 12% return. And, of course, investing in any one portion of the global markets increases risk.
Ramsey’s withdrawal rate guidance could cause retirees to run out of money well before they run out of time. Most research in the financial industry supports a 4-5% withdrawal rate, adjusted annually for inflation.
As with most financial advice, applying rules of thumb or general statements to your personal situation can be misleading. Take the time to determine what steps are needed to help you build financial security and get a second opinion if you’re not comfortable with the process on your own.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, Washington