Recently, personal finance expert Dave Ramsey made waves by dismissing the traditional 4% retirement withdrawal rule as “moronic” and advocating for an 8% withdrawal rate instead. While this headline-grabbing statement got plenty of attention, financial professionals are concerned about whether this advice is practical or sustainable.
The Risk of an 8% Withdrawal Rate
Larry Roby, RICP, MRFC, MCEP President and CEO of SFA Wealth, strongly disagrees with Ramsey’s advice. He points out that an 8% withdrawal rate is not just aggressive—it could be disastrous for many retirees. “One bad year in the market could completely decimate someone’s portfolio,” he warns.
Here’s why: If a retiree withdraws 8% annually and then experiences a significant market downturn (like a 20-30% drop), their portfolio may never recover. Not only would they be taking money out while their investments are down, but they would also have fewer assets left to generate future growth. That’s a risky game to play with retirement savings.
Investing Only in Equities: More Risk, Less Safety
Ramsey’s advice also includes investing 100% of retirement assets in equities (stocks). While stocks have historically outperformed other asset classes over the long term, relying solely on equities exposes retirees to extreme market volatility.
Larry explains that if investing this way worked for everyone, “then there wouldn’t be so many retirees struggling to make ends meet.” The truth is, not everyone can afford to risk losing a large portion of their portfolio in a market downturn—especially if they’re withdrawing funds at the same time.
A well-balanced retirement portfolio typically includes a mix of stocks, bonds, and other investments to provide stability. Bonds, for example, help cushion against stock market downturns and provide steady income.
When Could an 8% Withdrawal Rate Work?
The short answer? Seldom.
For an 8% withdrawal rate to be sustainable, retirees would need to guarantee an 8-12% annual return every year—something no financial professional can promise. While a few aggressive investment strategies might achieve these returns in strong market years, they also come with significant risks.
Some retirees use a “bucket strategy,” which allocates assets into different time-based categories (short-term, medium-term, and long-term). This approach might allow for slightly higher withdrawals from certain buckets, but even then, an 8% rate is pushing the limits.
What About the 4% Rule?
Traditionally, the 4% rule has been considered a safe withdrawal rate for retirees. However, even this number is being debated due to fluctuating bond yields and market conditions.
In the past, retirees could rely on bonds to provide a stable source of income. However, achieving a 4% withdrawal rate without depleting savings has been challenging during low interest rates. With bond yields rising, this strategy may become more viable again.
Ultimately, the right withdrawal rate depends on an individual’s portfolio, risk tolerance, and retirement goals.
A Personalized Approach is Key
Rather than following a one-size-fits-all rule, financial professionals recommend a customized approach. Larry suggests retirees review their withdrawal strategy at least once a year, if not twice, to ensure it aligns with their financial situation.
Some retirees may find they don’t need to withdraw much, while others may need to adjust their spending based on market conditions. Flexibility is key to long-term financial security.
Final Thoughts
While an 8% withdrawal rate makes for a bold headline, it’s far from practical for most retirees. Market downturns, longevity risks, and unpredictable expenses make such a strategy highly risky. Instead, a balanced, individualized withdrawal plan is the best way to ensure financial stability in retirement.
Suppose you’re unsure about your ideal withdrawal rate. In that case, consulting with financial professionals like the team at SFA Wealth can help you develop a strategy that protects your assets while allowing you to enjoy your retirement years confidently.