Forget the 4% Rule. Here’s What Dave Ramsey Says You Should Do With Your Retirement Savings

A lot of people think saving money for retirement is the hard part. Some actual retirees might tell you that’s the easy part.

The hard part, rather, comes when it’s time to start withdrawing from your savings. You don’t want your money to run out prematurely, but you also don’t want to deny yourself income you could use to enjoy your life.

For many years, financial experts were quick to recommend the 4% rule for managing a retirement nest egg.

The rules goes like this: Withdraw 4% of your savings balance in your first year of retirement. Adjust withdrawals each year after for inflation as needed. It’s that simple.

Experts believe that following the 4% rule gives your savings a good chance of lasting for 30 years. But Dave Ramsey isn’t a fan of the 4% rule. He thinks there’s another strategy savers can employ, provided they take a specific approach to investing during retirement.

The 4% rule could leave you short on income

The idea of having your retirement savings run out can be scary. The 4% rule may protect you from that to some degree, especially if you make a point to invest your retirement savings somewhat evenly between stocks and bonds. The stock portion of your portfolio can lead to growth while the bond portion can provide predictable income and stability.

One problem with the 4% rule, though, is that it may not give you the income you want.

Let’s say you manage to retire with $1 million. The 4% rule only gives you $40,000 a year, not accounting for inflation adjustments. But you may need more income than that to do the things you want to do.

Granted, you’ll probably have Social Security on top of savings. But still, following the 4% rule could mean denying yourself near-term income in the hopes of stretching your savings. Ramsey thinks there’s a better solution.

How to get away with withdrawing 8% of your savings per year

If you don’t like the idea of being limited to withdrawing just 4% of your nest egg each year, Ramsey says you can get away with an 8% withdrawal rate — provided you invest your entire retirement portfolio in stocks.

Of course, this approach has its risks. If the stock market tumbles, your portfolio could lose a lot of value. You’ll need to make sure you have a backup plan in that scenario, like a pile of cash in a savings account or even a home equity line of credit you can tap to ride out a market decline and wait for a recovery.

The nice thing about Ramsey’s strategy is that withdrawing 8% of your savings per year might give you a nice income to enjoy. The downside is the risk.

If you’re naturally risk averse, this strategy probably won’t work for you. If you’re comfortable with risk, it could put more money in your pocket each year in retirement. You’ll need to weigh those pros and cons.

Of course, there’s also a middle ground solution between the famous 4% rule and what Ramsey suggests. You could invest your portfolio in a somewhat aggressive manner — say, 65% to 70% stocks and 30% to 35% bonds — and then withdraw at a rate of 5% or 6% per year provided your portfolio can sustain that.

This way, you’re not taking on quite as much risk as Ramsey suggests.

Granted, you’re not getting an 8% withdrawal rate, but you may not need one. If you feel that 4% doesn’t quite give you the lifestyle you want, you may find that 5% or 6% gets you there with less stress and potential downside.