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In this first session of the Financial Mentor Podcast, Wade Pfau from RetirementResearcher.com, reveals deep knowledge based on published research about retirement income and return on investment assumptions for your portfolio.
What prompted this discussion was a disturbing publication by well-known author, speaker, and podcaster, Dave Ramsey claiming you can expect 12% long-term investment returns resulting in an 8% safe withdrawal rate.
Unfortunately, Dave's claims are NOT supportable by any of the data and run the risk of hurting listeners who follow his advice. In fact, as you will learn during the interview, Dave's claims are nearly double what the latest research would indicate is realistic to assume with important implications for financial planning. Wade and I set the record straight.
Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
In this episode you will get access to one of the top minds in retirement planning research today. Wade's original research has been featured in academic peer review journals and his insights are guaranteed to take your understanding to a greater level.
In this episode you will discover:
- How to forecast a realistic return for your retirement savings.
- Why your investment return assumptions are critically important to your financial planning.
- How safe withdrawal rates during retirement are calculated and what amount you should assume.
- The critical difference between an average return assumption (statistical fiction) and the real-world compound return assumption that is affected by sequence of returns risk.
- The difference between safe withdrawal rate research in the U.S. vs. safe withdrawal rates based on international data, and why you should be concerned.
- How much should you save each month to achieve financial security?
- How the wealth accumulation phase is completely different from the spending and distribution phase of retirement planning, and how to plan accordingly.
- And much more…
Resources and Links Mentioned In The Show:
- Click here for Wade's RetirementResearcher.com web site.
- Dave Ramsey's 8% Safe Withdrawal Rate article on RetirementResearcher.com
- Dave Ramsey's website
- My retirement calculator for running the calculations.
- My book teaching how much money you need to retire with financial security.
Help Out the Show:
I'm very excited to announce this first episode of the new Financial Mentor podcast. You can now expect 2 episodes per month designed to help you build financial wealth and live a wealthy life. Each episode will be packed with data driven insights and unconventional wisdom.
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Thanks for your support and I hope you enjoyed this episode. Please let me know what you think in the comments below…
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Hello Todd,
GREAT PODCAST! Glad to see you “back in action”. You sound like a professional radio guy! Great voice! And Mr. Pfau is an excellent resource….very credible!
As far as Dave Ramsey, I’ve read his books and listened to his radio program. Overall, he gives sound & reasonable advice. BUT, I have NEVER understood why he would promote such outlandish return assumptions and why no one has called him out on it. I am not a “financial expert” but I know enough NOT to expect this type of return (not to mention crazily high withdrawal rates assumptions). I worry about those people who follow him and may develop unreasonable expectations based on these assumptions. I wish that all his followers would listen to this podcast and learn!!
THANKS for sharing this with all of us. I hope everyone will share this with people that they know, love and care about. It really matters!!
Aloha, ellen
mrsmelon You are too kind, Ellen. I appreciate your supportive words and hope these educational materials help many. Great to hear from you.
Now that’s what I call a good start, Todd! I’m not sure how the rest of the episodes are going to work, but this one was like a yo-yo: bouncing from strategic to practical all the time.
Wade’s a smart fella, well-spoken, and I picked up a few tips from him. I like the intro and outtro bumper and perhaps most importantly, the way you facilitated the conversation and provided value beyond what Wade brought to the table. I’ll be listening to more and ready to leave you an iTunes review once the show “shows up.”
joeyjoejoe Awesome Joel! Thank you for all your support. I really appreciate your detailed feedback about what you noticed and what worked for you. I’m posting the next 3 shows to the site as I write this and feel they are all as strong as this one in very different ways. This is turning into a really fun project!
Thanks for the quality content and discussion. I look forward to listening to the other podcasts during my workout.
In my opinion Ramsey claims the 12% return to give “hope” to the common person with debt (his target audience) that they can get out of debt and that they can create significant wealth (become a millionare). Ramsey props up the claim with weak industry research and references. We should realizer In Ramsey’s world the ratios he claims really dont matter though because his goal is to get you to be frugal, to be accountable for your finances, to be debt free, to save for retirement, and to leave a legacy. If he can get his listener to do that then he achieed his goal. Hopefully in that process he has taught the listener enough about personal finance to research, learn, and understand the details of personal finance on a deeper level (he constantly states you should find a professional financial coach that has the heart of a teacher). In doing so hopefully they discover what real safe withdraw rates and returns look like.
Perhaps the real question is not whether we agree with his ratios bur rather does the end justify the means in Ramsey’s work and his tactic in making such claims.
applejob I’m confident Dave is well aware that his investment statistics are grossly inaccurate given the negative press they have attracted. Yet he persists.
I’m not clear how promoting deception in investing is justified by the end goal as you discuss. It is an inaccurate deception that leads to inaccurate financial plans and financially dangerous conclusions. It also causes accurate financial planning to look bad in comparison.
Again, I respect Dave’s work on the “get out of debt” side of things. He has helped many. This is not about bashing Dave because he is doing good work. Nobody is served by negativity.
Instead, it is about trying to correct the deceptions he has promoted on the investment side that are not supportable by research and dangerous.
Thanks for the reply Todd. I agree with your comments and I believe that DR is not respecting the dangers of making such claims especially as a financial industry icon with such great reach. thanks for filling the education need on this topic with real industry research. i checked out Mr. Pfau’s blog today and could have spent hours on it, great info.
on another note i was wondering if a whole life policy is a good tool to have to handle the sequencing issue as you can borrow against the cash value to fulfill your income requirement during a market downturn.
another idea that crossed my mind would be to make sure you have a HELOC available (assuming your mortgage is paid or close to being paid in retirement). borrowing against an asset like a home at a low rate would be better than selling stocks at a 40% market drop.
applejob Very complex issues you raised. Too complex to be properly handled via blog comment. Thanks for understanding.
I can’t believe I’m writing to you about this. I am not a CFP or brilliant scientist, I’m just a “get out of debt guy”. I am an avid Dave Ramsey show listener and have completed his counselor training course, so this will sound biased. However, I do believe that somebody should clarify some of the information you shared in this episode. Since you guest Wade Pfau said that he doesn’t really listen to DR, maybe I can bring the little clarification to the subject.BTW: Just as you did not want Ep1 to be a “Bash Dave Ramsey” show, I don’t want this to be taken as a hate letter either.
Many times when DR says “12%” it is to encourage people to start saving something. For example: DR will say $100 a month in good mutual funds averaging 12% for 40 years grows to $1M.” Yes it is unrealistic in today’s world but it pushes people to get moving! He will also follow it up with “if I’m half wrong you’ll still have $500k” as a joke but it still helps get his point across.
Correct me if I’m wrong but didn’t Mr. Pfau state that the withdrawal rate of 8% would decimate a 50% stocks/50% bond portfolio in less than 30 years? Dave Ramsey does not recommend a 50-50 portfolio split. He recommends all mutual funds with a mix of large cap small-cap come international, & mid-cap. It’s more volatile but also offers more growth.
DR also uses the 8% withdrawal rate as an example. I have never heard them say that you “have” to take out that much every year. He uses it as an example to show a caller/listener that you can take a living wage out of assets, say for example $50k. He also explains that you eat into the principal in the bad years but get some of it back in the years that make more than 8% (after inflation).
The “Save 15% into retirement” statement is a step DR teaches for people who are out of consumer debt and have an emergency fund. This allows them the ability to also save for kid’s college and possibly put more down on the mortgage. I think everyone can agree that saving for retirement takes priority over kids college but that some college saving can happen at the same time when you’re out of consumer debt.
His advice also pushes people towards a 15 year mortgage allowing them to have a paid-for-house in fewer years – which in turn allows them to save even more for retirement and wealth building. All this is to say that 15% is a guideline that will give them freedom to do other things while having a good amount started in a retirement account.
Finally (thank you for reading so much of this), DR advises that you work with a CFP or professional. I can’t recall a single time when he said to do it on your own but to instead find someone with the heart of a teacher so you know what you’re getting into.
After all is said and done, if you follow DR’s advice you will be out of debt except for a house with under 15 years to pay, retirement savings has begun, and kids college is being taken care of through 529/ESAs or cash flow. All that is left to do is save even more for retirement, more than 15%, and give a bunch of money away.
Is Dave Ramsey using 12% in his examples wrong? Maybe 12% is a higher rate of return then we will ever see – nobody really knows what the future holds. What I do know is that following DR’s Baby Steps for 7 years has caused my net worth to more than double. We have a plan, isn’t that all that matters?
MoneyPlanSOS Hi Steve, first off I really appreciate the respectful and constructive tone of your comment. I always welcome constructive criticism.
The crux of the issue is you can play loose with the numbers and pursue emotional appeal on the “get out of debt” side of things, but not with investing. In fact, I would go so far as to say that Dave’s lack of focus on accurate numbers is probably helpful to getting under people’s skin emotionally and helping them get out debt. The formula works well for him and his followers.
However, investing done right is all about numbers. The science of investing must be respected and Dave disrespects investing with his inaccurate and loose portrayal of statistics. It is a dangerous practice that can mislead people. Emotional investing is what causes bad decisions and destroys fortunes.
I won’t repeat all the points made in the podcast, but I will add that your argument about a 50/50 portfolio vs. an all stock portfolio only magnifies the problem rather than fixes it. The reason an 8% withdrawal rate can’t work is because of volatility and the sequence of returns risk. Increasing the stock allocation obviously does not solve the problem as you implied.
My position is that Dave is extremely high profile and that implies a certain level of responsibility. It is not appropriate for him to make investment claims that are 100% false and not supportable by research. It misleads and deceives people. That is not acceptable. It is irresponsible.
Again, he has helped many people on the debt side and has my respect, but his investment advice is riddled with gross inaccuracies as clearly stated in the podcast and best avoided. Listen to him for help with your debt. He is brilliant. But I believe you would be better served to find other experts for your investment strategy.
Hope that helps clarify…
Financialmentor Thanks Todd. I’m going to continue to do what I have been doing for the past few years: Learn all I can, measure my tolerance for risk, investigate possibilities, and put money into things I understand.
There is no harm in challenging the ideals and positions of many, only in taking action from the advice of only one.
Hello Todd,
I just found your podcast via an interview you did with Jeff Rose and I’m glad I did. This first episode was pretty enlightening. Often times we’re given such canned advice as if to say the same thing will work for everyone. It’s very easy for a 30 or 40 something year old to think their doing the right thing if they just save 10 to 15 % of their income into a retirement account. More of us, myself included need to really figure out what we want out of life and design a plan to get there. I think we need more professionals asking better questions of their clients instead of just assuming everyone wants to retire at 65. I like how your cognizant of what your clients want rather than just assuming what they want. The withdrawal rate wasn’t something I thought much about but its really an eye opener.
Anyway…Thanks again
frank_manzella You’re welcome, Frank. Thank you for taking the time to share your thoughts. I really appreciate the support and encouragement.
Financialmentor frank_manzella You’re very welcome…looking forward to learning more from you…Take care Todd
Wade said it best when he said “People want to believe” they can get 12% if a financial planner says so.