Dave Ramsey’s Retirement Income Strategy Has a Very Serious Drawback

If you’re working and collecting a steady paycheck, you’re hopefully saving some amount of money for retirement each month.

You’ll need retirement savings to supplement your Social Security benefits. In fact, if anything, those benefits should serve as a supplement to the savings you bring into retirement — not the other way around.

As important as it is to save for retirement, it’s equally important to manage your nest egg wisely once you stop working. That means coming up with a smart withdrawal strategy that helps lower your risk of running out of money over time.

Many financial experts recommend the 4% rule as a strategy for managing retirement savings.

The rule says that if you withdraw 4% of your savings balance your first year of retirement and adjust future withdrawals to account for inflation, there’s a very good chance your nest egg will last 30 years. This means that as long as you don’t retire too early, there’s a strong chance your money will never run out on you.

Dave Ramsey, however, has another strategy he likes to suggest for managing retirement savings. It’s an approach that could leave you with a much more generous annual retirement income. But it’s also an approach that carries a lot of risk.

Should you invest more aggressively for larger retirement withdrawals?

While many financial experts feel that a 4% annual withdrawal rate is appropriate in retirement, the problem is that it may not provide you with the income you need to maintain your desired lifestyle. If you intend to spend a lot of time traveling or pursuing costly hobbies, you may need more annual income than what the 4% rule allows for.

Dave Ramsey says that with the right investments, you can withdraw as much as 8% of your nest egg per year without putting yourself at risk of running out of money. To do that, though, you need to pretty much invest your entire nest egg in the stock market. And there lies the risk.

The stock market can be very volatile. It’s a good idea to keep a portion of your portfolio in stocks during retirement so your money can continue to grow. But keeping 100% of your portfolio in stocks is very risky.

Let’s say you have a $2 million nest egg invested in the stock market and there’s a crash that causes a 20% drop in stock values. Suddenly, your portfolio is only worth $1.6 million.

If you stick to your usual withdrawal rate, you’ll have to sell investments at a lower price to access money from your portfolio, thereby locking in losses instead of waiting for the stock market to recover.

The safe way to use Ramsey’s suggestion

The upside of following Ramsey’s advice is that it could lead to a more robust retirement income. However, if you’re going to invest 100% of your retirement portfolio in stocks so you’re able to take 8% yearly withdrawals, you’ll also need to maintain a savings account with enough money to cover two years of expenses at a minimum.

While some stock market crashes are short-lived, others can drag on. Having a large amount of cash savings allows you to leave your portfolio alone during market declines. That could mean not selling investments at a loss while the market is down, thereby preserving your nest egg.

Before you decide to follow Ramsey’s suggestion, take a look at your savings balance and try to calculate your annual retirement income needs. It may be that sticking to a 4% withdrawal rate gives you access to enough money to live your desired lifestyle. If that’s the case, why take the risk Ramsey is suggesting?

However, if you won’t be happy with a lower withdrawal rate, Ramsey’s advice is something to consider. Just make sure you’re protecting yourself with cash at the same time.