In Part 1 of our Dave Ramsey series, I expressed concern about Dave’s teaching on what I view as an over-emphasis on wealth and riches. We explored whether becoming rich was the driving force behind his popularity and compared that to what the Bible says. We acknowledged the huge impact Dave has had on helping Americans break their dependence on debt. For those contributions, whether you like Dave or not, you owe him a big thank you!
In this post, I plan to highlight some of Dave Ramsey’s teachings that I just can’t agree with from a financial and ethical standpoint. Again, these posts are not meant to attack Dave Ramsey. If he has helped you in the past or is helping you now, I wish you nothing but continued success! But just because Dave is a star and is popular doesn’t mean he gets everything right!
If you’ve listened to Dave Ramsey just once, I’m sure you’ve heard advertisement after advertisement for his ELPs (endorsed local providers). These endorsed local providers pay Dave huge advertising fees in order to receive referrals from his website, radio show, etc. The professions “endorsed” are investment advisers, real estate agents, insurance, health insurance, and tax services. If you go to his website, you can click to find an endorsed local provider near you.
What’s my beef? These people are simply paying Dave an advertising fee. There is no possible way Dave could check the thousands of individuals out to see if they are ethical, competent, and share the same values. The other major beef I have is that the investment advisers are usually brokers! As noted in an earlier post about different types of financial professions, brokers are going to try to sell you something. They are not financial planners and have clear conflicts of interest that prevent them from providing objective advice.
I just don’t see how someone could “endorse” people they’ve never met before. It is really irritating to think of all the people who have followed Dave’s plan to get to investing 15% of their income in retirement only to be sold overpriced mutual funds by an ELP.
12% Returns on “Good Growth Stock Mutual Funds”
I’m sure this advice originated in the 90′s when a monkey could have received a 12% return for most of the decade, but Dave needs to get real! If he is going to keep parroting this advice as if it were true, please provide some ticker symbols to show the rest of us some proof behind the claims.
People usually respond to this criticism by saying the actual returns don’t really matter. “In the long haul, mutual funds will provide a good enough return to provide for people in retirement.” The actual return is one of the most important parts of planning for retirement. If your planning on 12% returns, you may never be able to retire! When most of the great minds in the investment world are predicting stock market returns in the 7% range going forward, you have to wonder why Dave Ramsey continues to say “invest in some good growth stock mutual funds that will return 12% over the long run.”
8% Safe Withdrawal Rate in Retirement
The safe withdrawal rate (SWR) is the percentage amount a person can withdraw from his investments in retirement while not using up all the funds. In other words, how much can I withdraw each year from my savings and not run out of money before I die? This is an extremely complex area of study, and there are men way more qualified than I who are still researching to figure it out. Here is an excellent article on SWR rates from Todd @ Financial Mentor that does an awesome job of summarizing the current research in an easy to understand manner (it is a long read).
So what is the commonly accepted percentage baseline to withdraw each year from your savings and not run out of money? 4%! Please take the time to read the article above from Todd to understand why 4% might even be too high.
So what does this mean? It means that no respected person in the financial planning, investment management, and retirement community is telling people to use 8% as a SWR when planning for retirement.
Why Should This Matter To Me?
For the normal people out there who don’t get all excited about retirement research and investment management, you might be thinking, “why do I care?” The main reason everyone should care is the consequences of being wrong. What if you were expecting 12% returns on your investment and only receive 5% returns? Well, you could possibly never be able to retire. So instead of saving more money, you save less because Dave Ramsey said you would receive 12% returns from good growth stock mutual funds.
The exact same scenario is true for the 8% SWR. You get to retirement and think you have plenty of money. 20 years later you are flat broke and relying on the government, friends, and family to support you. Neither of the above scenarios are something you want to happen. That is why this kind of advice from Dave is so dangerous!
I’m sure you think I’m a Dave hater trying to get some traffic to my blog. I promise that isn’t the case! I just wish Dave would limit his message to debt. If he isn’t willing to do some common research to present accurate facts, he should stay away from retirement planning advice entirely.
I’d be interested to hear your take on Dave’s retirement and investment advice! Do you think the ELPs are trustworthy?