#186 – Dave Ramsey Says You Can Withdraw 8% From Your Retirement Portfolio

Wes Moss [00:01:27]:
We’re all in there. It’s like a battle royale over a number that we should just all agree on, and that’s your withdrawal rate. This debate is around how much you should really be allowed to use your own money today here on the retire Sooner podcast. Welcome. Mallory producer here.

Mallory Boggs [00:01:49]:
Thanks. Hi. I’m so excited to dive into this because it has really dominated our headlines in the recent months.

Wes Moss [00:01:56]:
Yeah, it really has. And it started in the summer of 2023, when none other than Susie Orman came out and said, you can only take 3%. 4%. Scary and dangerous. And then Morningstar published something that said, the 4% rules back, and the Wall Street Journal put their stamp on it. And then Dave Ramsay, I don’t know if he accidentally said this, but he was pretty emphatic about it, said, you should be able to use 8% of your money in any given year, never run out. And just. The Internet exploded.

Wes Moss [00:02:26]:
This is a nuclear event within the financial planning world.

Mallory Boggs [00:02:29]:
Well, it’s so crazy to you maybe, because this is a number that everybody should consistently be planning for, and then we just get all this back and forth. How are you supposed to confidently withdraw your retirement savings?

Wes Moss [00:02:41]:
The 4% rule is it’s treated so poorly, and it’s such an important rule, because, again, we’re talking about. There’s really kind of two things I’m talking about here. One, your withdrawal rate in general, that is so critical that whatever number you set on that, there shouldn’t be a big debate around that. You should lock that in, understand why you’re using it, because it really impacts all of your planning. But it’s hard to do that when you hear me here on the retire sooner podcast saying the 4% plus rule, and then you hear other financial folks and media outlets saying, that’s way too.

Mallory Boggs [00:03:23]:
Much, and it should be Susie Orman.

Wes Moss [00:03:25]:
Susie Orman on her private island. That’s true. She does have a private island, supposedly. And then you’ve got Ramsey, who’s great. I think that he’s.

Mallory Boggs [00:03:37]:
You have to respect that man. He has helped a lot of people.

Wes Moss [00:03:41]:
Yeah, he’s helped a lot of people. I think he is very good at what he does. And actually, there is some merit to why he has this much higher rate of return that he talked about to a live call in on his show recently, which we’ll get to that story in just a second. But here’s why your withdrawal rate is so important. One, it dictates how much you need to save every year, and that’s a 30 year, 40 year journey. Your withdrawal rate dictates what kind of rate of return you need to get on your overall savings to hit your goals. Ultimately, your withdrawal rate dictates how much you can pull out from your investments. Right.

Wes Moss [00:04:20]:
It’s all about being able to max out what you pull out of your investments without running out. Your withdrawal rate dictates how you should invest what your asset allocation should be. If you assume a higher withdrawal rate, you may only be able to achieve that if you’re 100% in riskier assets. Lower withdrawal rate maybe you can stay in cds. Your withdrawal rate dictates how much psychological stock you put into what your savings is every year over time, and then it dictates how much confidence you have in not running out of money for the rest of your life. Your withdrawal rate also should take into account how much you’ll be able to increase your withdrawals from your investment assets for inflation. And then, of course, when it very much helps dictate when you’re able to stop working and your overall retirement plan. And that’s just off the top of my head.

Wes Moss [00:05:22]:
I’m sure there’s others. It’s a big deal.

Mallory Boggs [00:05:24]:
It seems like this is a really foundational piece for any kind of retirement plan. You can’t really have a retirement plan without knowing how much you’ll need to pull out of the account every year.

Wes Moss [00:05:36]:
Exactly. And there’s confusion around it. I’ve found articles that say 3% is the number, 4% is the number, 4% is not the number. Four to 6%. There’s just another Morningstar piece about this. Four to 6%. And then, of course, the big headline event is Ramsay coming in and saying, you should be able to take 8%. No wonder everybody’s so confused.

Wes Moss [00:06:04]:
These are all well listened to, well known, well respected, either. People that have been doing this for a long time and media outlets that cover this every day.

Mallory Boggs [00:06:13]:
Well, and very smart individuals who clearly know what they’re doing. It’s definitely people that I personally have a lot of respect for.

Wes Moss [00:06:21]:
And really, they all have a point, and none of them are completely wrong in everything they’re saying. So there’s a case for all of this. I think it’s important to understand these cases, because let’s start here. Fundamentally, you got to decide on a rate because of all the reasons we just listed.

Mallory Boggs [00:06:38]:
First of all, can I run through those again really quick? Because I thought that was.

Wes Moss [00:06:42]:
I feel like you’re already writing an article about it.

Mallory Boggs [00:06:45]:
Yes. You’re jotting it well. It’s one of those things. You realizing how much goes into it. I mean, how much you need to save the return rate that you need, how much you can actually pull out of your account, how to invest based on risk and return the psychological stock that you can put onto it. The confidence of not running out of money, accounting for inflation, which, lord knows, we’re talking about all the time on here. And then even, I mean, at the end of the day, the biggest one, right, when you can retire.

Wes Moss [00:07:12]:
Yeah. So that number moves the meter big time on all of that. So you got to have confidence in it. And the 4% rule has been, to some extent, the gold standard. When William Bangin came out with his body of work right around early 1990s, and it has been the gold standard, however, it gets treated really poorly because I think of it. I don’t know. I was walking in midtown and this week, and I was thinking, as I was reading these stories, I’m thinking it’s almost like they’re treating the rule like a terrible dog owner. It’s like, you go in, it’s like, oh, we want a puppy.

Wes Moss [00:08:00]:
Here’s the puppy. We’re going to bring the puppy home. And we love the puppy. We’re cuddle up with the puppy, but then we get tired of it because it gets into the trash or it pees on the carpet and get rid of the puppy. Kick the puppy out. It’s gone. And then the Wall Street Journal comes back and says, oh, no, we missed the puppy. It works again.

Wes Moss [00:08:16]:
Bring the puppy back. Okay. And then interest rates go down a little bit, and then the next thing you know, get rid of the puppy. Oh, wait a minute. We missed the puppy. Bring it back. And that’s this. Back and forth.

Wes Moss [00:08:26]:
Yes, we love it. No, we hate it. Yes, we love it. No, we hate it. Back and forth. Ping pong, which is, you just don’t do that when you adopt a puppy. You bring a puppy home for life. And the 4% rule, in my mind, is that same thing.

Wes Moss [00:08:39]:
It’s not something that’s willy nilly. Yes, I like it. One day. No, because it’s something that is supposed to last the test of time and help you determine what you’re able to live on for the rest of your life. This is not a fly by night rule. This is not a willy nilly rule. This is something we need to understand and have some real backing behind it. A quick refresher, the way the 4% rule works, or 4% plus rule.

Wes Moss [00:09:09]:
Take your starting retirement balance, let’s call it a million dollars. Year one. You take 4% of that, let’s call it $40,000. And then that dollar number is your figure. That then gets adjusted by whatever inflation is in any given year. So if we have a 10% inflation, your $40,000 jumps to 44,000, and that’s the new number. And then if we have 0% inflation, the next year, it stays at 44. If we have 1% inflation, it goes up by 1%, and it stairstep climbs over time.

Wes Moss [00:09:43]:
And again, we said on your list, it somewhat dictates what your overall asset allocation should be. And in Bengan’s original research, and part of the reason you’re able to increase for inflation over time is having at least 50% in stocks, 50% to 70% in equities, the other 50, 40, 30% in fixed income. So put that all together, and that’s how the 4% rule works and is aimed towards protecting your purchasing power. The reason we study it is we want to give a probability or understand what probability I have that I’m able to do that, utilize my money at that rate plus inflation and not run out over 30, 40, 50 years.

Mallory Boggs [00:10:28]:
I feel like that’s always the biggest question with retirement, is, how do I one save enough for retirement? And then I feel like one of the most difficult things is figuring out how to withdraw that money. In a way where you can confidently feel like you will not run out of money. Because I think losing an income source and moving to living off of savings has got to be one of the scariest transitions people make in life.

Wes Moss [00:10:51]:
Very scary. It’s scary for anybody. So you want to really understand why you’re able to create this new paycheck out of this XYZ number all over the map in the industry. As low as three, as high as eight. Here we’re saying no. Why? It’s at four. Now, even I probably make it more confusing than it needs to be, but I purposely don’t give it an exact number because it is not an exact rule. It is a rule of thumb.

Wes Moss [00:11:23]:
So I think it’s important to say 4% plus because it really is anywhere from four to four and a half percent and should be able to be adjusted in any given year, meaning that it’s a dynamic role. Some years, you may want to take a little less than four. Some years, depending on how things go in the market, both the stock market and the bond market, you may be able to take more than that in any given year, or a lot more than that. There are periods of time in history, and I call this the Buffett zone, where if you’re following this rule, you hit a good stretch of market returns. The money lasts essentially for infinity. It doesn’t run out, and it grows and grows and grows. And we have some examples that over the course of 80 some years, your million turns into 100 plus million. Now, that likely doesn’t happen, because then you adjust, because life is dynamic and we all adjust over time.

Wes Moss [00:12:18]:
So it’s a guide, and it’s home. If we go beyond it, we want to come back to that 4% home. If we feel as though we want to scrimp a little bit and spend less in any given year, bad market stretch, then we come back home to the 4%. So that’s our center, if you will, for those who out there who meditate, even though I don’t know. Is that right? You do this.

Mallory Boggs [00:12:39]:
I love yoga.

Wes Moss [00:12:40]:
Where do I center?

Mallory Boggs [00:12:41]:
Where do I go back? All of the yoga, the meditation, I like to do it all. Let’s be very clear. It keeps me balanced.

Wes Moss [00:12:48]:
Back into center. Okay.

Mallory Boggs [00:12:49]:
Back into center. Little ohm.

Wes Moss [00:12:52]:
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Wes Moss [00:13:23]:
That’s wesmossbooks.com. So Ramsay, who is great, gets a call into a show from, I think Jay in Kansas City says, look, I’ve got $120,000. And according to one of the guys you work with, Dave, and I think there’s some other financial people that publish content on his site as well. He said, but I know that so and so on your team says we can only use 3%. So I’m planning on 3% in the future. And Ramsay, you can see his face. He goes blank.

Mallory Boggs [00:13:54]:
The rage, the rage that comes. I love whenever Dave Ramsay gets mad, I will say, a guilty pleasure of mine. And I watch this on YouTube. Phenomenal. I think if you just search, like, Ramsay, 8%, it’ll pop.

Wes Moss [00:14:07]:
It’s not that rare that this happens for him, but he gets visibly pissed right out of the gate.

Mallory Boggs [00:14:12]:
So upset. Well, it’s interesting. You never see anybody. He’s so upset at his own team, even. He’s just like, we’re taking that video.

Wes Moss [00:14:19]:
Because if we put up that he’s like that, his, his Tennessee, whatever accent, Wes put up that crap, we need to take it down. And I didn’t realize until I listened to it carefully that it was actually somebody on his team that put that video up. And again, kind of a big deal to not kind of a big deal because it’s a really important number. So Ramsay gets pissed about it. He’s like, wait a minute. You can’t. 3% is rubbish. It’s ridiculous.

Wes Moss [00:14:52]:
It doesn’t sound like he spent a whole lot of time on this, but little does he know, just a few months ago, Susie Orman said the same thing. You can only use 3%, so there’s other people out there saying it now. Instead, he takes the pendulum all the way to the other side, and he says, I’m perfectly comfortable. This is to Jay from Kansas City withdrawing 8% a year.

Mallory Boggs [00:15:20]:
I don’t think I’ve ever heard somebody throw out a number that high.

Wes Moss [00:15:24]:
Never heard anybody say that.

Mallory Boggs [00:15:25]:
No.

Wes Moss [00:15:25]:
He said, these are just this. I’m just quoting him. If you’re making 12% in, quote, good mutual funds and the S and P is averaging 11.8 and inflation is 4%, then you’re making twelve minus four, eight left over every year, you should be able to take that. If you want to be a little bit more conservative, take seven, but sure, not five or three. And then he goes on to say all these. The people that are saying this crap, all the goobers out there who’ve put this 4% crap in the market, maybe 5%, it’s too low. So he’s railing against the 4% rule.

Mallory Boggs [00:16:09]:
He is hating on it so hard.

Wes Moss [00:16:11]:
And he really obviously can’t stand the 3% rule. So no wonder his blood pressure is going through the roof here. But I understand why he’s so mad about this. Because when you lower that number, four in itself doesn’t make it easy. Because, again, it’s only 40,000 per million dollars you’re saving. So what Ramsay is essentially saying is you’re already scrimping by, and if it’s at three, next thing you know, it’s going to go down to two. Now, we’re going in the wrong direction here. And then you get to the point where it’s almost too much work and it’s not.

Wes Moss [00:16:55]:
And at that point, the juice you’re getting out is not worth the squeeze, the efforts. You spend 30, 40 years saving money. If I could only use two and a half percent, get 25 grand out of every million, then he’s right in that it almost stops people in its tracks. And, like, what’s the point? I’m going to Yolo from now on. I’m not going to have the discipline and the effort to save all this money. Because if I can’t really use it, if it’s going to run out, and if I only use two or 3%, then the way I’ve looked at it is this whole what’s the point? Can have a negative impact for just the whole psyche of people saving money to begin with. So his point is that it’s dangerous if you’re starting to flirt with these numbers that are too low because you get people to give up before they get started.

Mallory Boggs [00:17:47]:
I will say it kind of comes back to what we’ve discussed many times on here, which is just that finances are so much more about psychology and peace of mind and having that psychological confidence in your investments and your withdrawal rate.

Wes Moss [00:18:05]:
That’s a great point.

Mallory Boggs [00:18:06]:
Market performance is not necessarily the driving factor sometimes in people’s decisions.

Wes Moss [00:18:10]:
Well, it’s one big factor. But you also have to have a confidence around all the other pieces. You’re right. You can’t go into this with your understanding of how it’s all working. Kind of flap it in the wind, doesn’t work again. So I got to say, I like Ramsey’s optimism here. But if you’re thinking about a withdrawal rate that’s that high, those numbers just don’t work well enough. There’s just not that high of a probability that money would last over 30 years.

Wes Moss [00:18:38]:
It’s not impossible. And there are certainly periods. There are periods of time, if you were 100% in stocks, you could catch a good market cycle. It could work. And I’m going to go through those numbers in a minute. But a couple of points of clarification. Even though the stock market has the average rate of return in any given year is about 12%, that’s not as relevant. It’s a good guide.

Wes Moss [00:19:05]:
But the number that really matters here is the average annual compounded rate of return. And those numbers are different. So if you go back and look at, if you choose 30, 40, 50 year chunks of time, it’s really hard to find a period that long that ever gets to an annualized 12% rate of return. Most of the time you’re looking at 1010 and a half. Eleven. Slightly more than eleven, but it’s really hard to find. Or at least I haven’t found the right combination of years where that’s a really long period. That’s been a full twelve.

Mallory Boggs [00:19:40]:
It’s interesting, I feel like that’s one of the moss confusing pieces when you start talking about investments and returns, is figuring out how to really measure them, because it’s one of those things that everything’s always rolling and people have different ways that they’re calculating things.

Wes Moss [00:19:54]:
Different time periods.

Mallory Boggs [00:19:56]:
Yeah, you look at the different time periods and there’s no telling.

Wes Moss [00:19:59]:
You look at a ten year stretch in the essentially right after 1999, where markets were essentially flat for mostly a decade. So you put that in and you look at a 15 year period, it skews the numbers dramatically. But I wanted to look at really long periods of time. So, first of all, I’d say saying twelve is too high to maybe start with number one. Number two, I’m a believer in having some balance, particularly when you’re in retirement. So that I absolutely believe in stocks, and I think it should be the majority of the portfolio, but it doesn’t mean there shouldn’t be a significant portion for ballast, safety, steadiness, income, and that would be fixed income. So I’m a believer in a balance approach, particularly in retirement. I think if you’re 2030, even forty s, one hundred percent equities is completely fine, provided you’re okay with the yoyo of values and the risk that comes along with that.

Wes Moss [00:20:59]:
But there are very few ways to get to the double digit rates of return unless you’re vast majority equities.

Mallory Boggs [00:21:08]:
Well, I’m all about some equities, especially at a younger age. But I do remember just working here and with capital during the COVID crisis with the markets, how important it was for so many of the retirees that were here and having that dry powder. And we would talk about that so often. And so returns sound really great whenever the market’s going great. But it’s amazing to see just that comfort that so many people have whenever they have that dry powder in their portfolio.

Wes Moss [00:21:35]:
Right. And it doesn’t mean that you want to curl up in a ball and always have everything in safety. We’ve proven that historically you’re going to run out of money most quickly if you were reinvesting in cds every year. And if you’re trying to take withdrawals and increase them for inflation. The quickest way to run out over time is to invest only in cds and only in dry powder. So it goes back to having a balance, but the real horsepower in the engine, at least over time, through price appreciation and the growth of dividends. And even just looking at the S and P 500, put those two together, price increases plus dividends, that’s what’s really helping protect your purchasing power. And that’s what makes any of these rules really work.

Mallory Boggs [00:22:25]:
We do love dividends.

Wes Moss [00:22:27]:
We do love dividends. Even better. Growing dividends.

Mallory Boggs [00:22:31]:
Yeah.

Wes Moss [00:22:31]:
So right out of the gate saying twelve, I think that’s when you’re assuming for planning purposes, you’re always being more conservative. Anyway, you don’t want to say, well, let’s find the best stretch, and we’re going to count on that. That doesn’t really work. Now, when he says good mutual funds are, quote, good, we know that he likes american funds. So this group that he called super Nerds, so the super nerds with their calculators in their parents basement is what he said. They said, sure, you’re going to call us super nerds. We’re going to embrace it. We’re going to show you why this doesn’t work.

Wes Moss [00:23:05]:
So they took a collection of stock mutual funds from american funds. They found pretty good, some of the better ones that had a 12% rate of return since inception and said, great, let’s put your million dollars in this collection of all stock mutual funds from his favorite fund company. I don’t know if it’s a favorite, but I know that he’s known to be partial to that fund family. And let’s see if it works. And lo and behold, very simply, if you start with 8% but 80 grand from a million year one, it grows to over 100,010 years later because of inflation or so. And guess what? Because you had two bear markets in a relatively short period of time, that investor scenario historically runs out of money in 13 years. That’s bad.

Mallory Boggs [00:23:59]:
That’s a very short retirement.

Wes Moss [00:24:01]:
And that was the quote. The super nerds who were punching back after Ramsay kind of ripped these guys.

Mallory Boggs [00:24:07]:
To be clear, I always trust a nerd with a calculator when it comes to numbers.

Wes Moss [00:24:14]:
So I think if you change it to the 8% rule, I think you’re, to some extent on a crash course running the numbers over the course of history. We’re going back to 1927. So we didn’t just cherry pick a tough time in the market. We looked at all scenarios. If you’re using an 8% withdrawal rate and you’re using 100% stocks, SP 500, and you’re assuming what he said, a 4% inflation number, then only 42% of the time, money lasts more than 30 years. So you have almost a 60% failure rate. If you’re using that, doesn’t mean it doesn’t work. So I’m not saying Ramsay is totally wrong, but that’s not a rule you want to bank on.

Wes Moss [00:25:00]:
It’s not even at 50%.

Mallory Boggs [00:25:01]:
Now, I have a rule of thumb. If the weather tells me there’s a 50% or core chance of rain, I take an umbrella.

Wes Moss [00:25:08]:
That’s funny. I don’t. I always think, oh, it’s probably not going to rain.

Mallory Boggs [00:25:11]:
Really? It’s because I did some outdoor events for a while, and so I got really good at reading the weather. I was like, oh, 50%, it’s going to sprinkle at some point.

Wes Moss [00:25:20]:
I guess it depends. I mean, if you’re going to work, you’re always in your car, and you’re under. If I’m going to a lacrosse tournament, you’re right. And I’m going to be outside for two days. I agree. I’m going to take a number out. All right. Now, if you use 8% withdrawal rate, 100% stocks, and actual CPI over the course of history does a little better.

Wes Moss [00:25:37]:
You have a 52% success rate. Money lasted more than 30 years. Still, it’s like a flip of a coin. Now, the way we run this next one is it also gives you another layer of insight that I like. 8% withdrawal rate, 100% stocks, and then zero CPI. So you’re taking 80 and you’re not going to increase it for inflation. You’re still taking 80 every year. How long does money last that way? With an 8% withdrawal rate over the course of history?

Mallory Boggs [00:26:07]:
I’m going to guess this one lasts for.

Wes Moss [00:26:12]:
What percent of the time does it not run out? For at least 30 years.

Mallory Boggs [00:26:17]:
Okay, I’m going to guess for this 170 percent of the time.

Wes Moss [00:26:20]:
Close, it’s 80.

Mallory Boggs [00:26:22]:
Oh, wow.

Wes Moss [00:26:24]:
Which just shows you it takes a 40% or a 50% success rate all the way up to 80.

Mallory Boggs [00:26:30]:
Wow.

Wes Moss [00:26:31]:
That’s how big of a deal inflation is. So if you take the inflation, insidiousness of inflation out of zero, you’re not ratcheting your withdrawals out for the cost of living, then 8%. Isn’t that crazy? The problem is we don’t live in a world where there’s no inflation.

Mallory Boggs [00:26:46]:
We just did for a couple of years.

Wes Moss [00:26:48]:
We did for a little bit.

Mallory Boggs [00:26:49]:
Unfortunately, we got a crash course that it is back.

Wes Moss [00:26:52]:
So what’s the answer? The 8% thing just doesn’t cut it. It’s too much.

Mallory Boggs [00:26:58]:
It’d be nice if we could, though.

Wes Moss [00:27:00]:
It’d be nice. Wade foo or foul? I still don’t. Nobody’s ever told me how to pronounce the name.

Mallory Boggs [00:27:08]:
I feel like whenever it first came out, it said foul.

Wes Moss [00:27:11]:
P-F-A-U. Wade. I feel like it’s foul.

Mallory Boggs [00:27:15]:
No silent peep. Foul.

Wes Moss [00:27:17]:
I’m pretty sure it’s Wade fowl. He’s vampirishly low at three. He’s dashing one’s hopes and dreams so they don’t even save anything. That’s the wrong way. And guess what? Like most great debates in world history, the answer is somewhere right in the middle. So it’s the 4% plus rule. Bengan’s original body of work was right. The 4% rule I think was right.

Wes Moss [00:27:52]:
And remember a few years ago he upped it to four and a half percent because he’s saying, if you include small caps, which is diversified portfolio of not just large but also small cap equities, have done even better than large cap stocks over time that were able to get to this four and a half number. And again, his numbers are right. So really it’s a range. And it’s really about always coming back to that four to 5% range. That’s why it’s a 4% plus rule of thumb. We redid, bang, and study. We’ve re upped it. We did it in 2017, we did in 2020.

Wes Moss [00:28:29]:
We’ve done it every year. We keep re upping the study, and here’s where it shakes out. And by the way, in excel, it helps to pick a number. When you’re running the analytics, you really want to pick a number. So we picked four and a quarter withdrawal rate, 60% stocks, 40% bonds, actual CPI, actual bond returns and stock returns. We went back and got the data from Robert Shiller’s Yale School of Management, and utilizing that, starting back in 1927, retiring in any given every single month, restarting your retirement, running the scenarios. What percentage of the time does the money last? At least 30 years.

Mallory Boggs [00:29:16]:
I love this study. So I think I have a guess. 96% of the time.

Wes Moss [00:29:23]:
95% of the time.

Mallory Boggs [00:29:25]:
I’m just a little too optimistic, I think.

Wes Moss [00:29:27]:
You’re thinking if you run it at four, only 4%, it’s even higher.

Mallory Boggs [00:29:33]:
I like those odds, personally, 81% of.

Wes Moss [00:29:35]:
The time, money lasts for more than 45 years. So you retire 60. That gets you to 105. That’s some pretty serious planning. And guess what? 74% of the time money lasts for greater than 50 years. And we get into this almost infinity buffett zone when that happens, because there are many periods throughout economic and market history where you get a good run of returns early on and your portfolio gets so big so quick that the 4% chunk just doesn’t hurt it.

Mallory Boggs [00:30:11]:
You know what’s great is that could always be the next run in the next few years.

Wes Moss [00:30:16]:
You’re so optimistic.

Mallory Boggs [00:30:17]:
I know.

Wes Moss [00:30:18]:
All right. And here’s why. Even in the market is average, let’s call it eleven. Why taking eight doesn’t work now? Because inflation really hasn’t averaged four. It’s been more like three. So eight plus three, 8% withdrawal, 3%. Inflation is eleven. The market’s averaged eleven.

Wes Moss [00:30:38]:
So why would money run out over time? Of course, the simple answer is the market doesn’t work as an escalator. It’s not slowly going up by 11% per year. It’s feast or famine. You get up 25%, down ten, up 35%, down 20%. So the market works to some extent, a feast or famine way, if you’re looking at any given year, and guess what? You need money. Every year, markets over long periods of time have averaged that 11% number that always gets quoted. But it comes down to something called sequence of return risk. It’s when I’m getting my returns as opposed to my average rate of return.

Wes Moss [00:31:27]:
Connor Miller from the money matters team did this. It’s an amazing way to look at this million dollar portfolio. Investor withdrawals 5% from the year 2000 to the year 2020. Exactly $50,000 a year invested in the s and P 500. Their age really doesn’t matter here. It’s really the year. It’s the year 2000 all the way to the year 2020. The average compounded rate of return over that 20 year period is a little over 8%.

Wes Moss [00:32:01]:
It’s 8.19%. And at the end of that period of time, again, it’s a million dollars. You take 50 grand out every single year. We’re not adjusting for inflation. The average rate of turn, 8%. 8.19%. The balance, your million, is now worth 404,000. So it’s gotten cut in more than half in 20 years.

Wes Moss [00:32:28]:
Now, let’s look at this in reverse. Here’s what I mean by that. Same exact annual rates of return just turned upside down. So, as an example, the first year in our original table was down 9%, and our last return in the year 2020 was up 18.4. So you just flip them. So we say our first year we got 18.4, and our last year, we got 9.1.

Mallory Boggs [00:32:54]:
Okay, so you’re almost, like, randomizing, but you’re taking.

Wes Moss [00:32:57]:
No, I’m not randomizing. I’m literally, if you think of the rates of return as a ladder, I’m taking a rod in the center of the ladder. There’s a rate of return on each one from 2000 to 2020. And I’m flipping the ladder on its head. And the bottom, Ned, is at the top, the top is now at the bottom. Okay, so guess what? What’s my average rate of return if I flip the returns?

Mallory Boggs [00:33:20]:
Because before it was 8.18.19.

Wes Moss [00:33:22]:
8.19.

Mallory Boggs [00:33:24]:
So I’m going to assume that it’s going to be similar, and I’m going to say it’s 8.19.

Wes Moss [00:33:28]:
Again, it’s exactly the same.

Mallory Boggs [00:33:30]:
Really?

Wes Moss [00:33:30]:
8.19, it’s exact same. 20 years of return. It’s just flipped upside down. Math is exactly the same. Right? Here’s what’s so important. First example, left with a little over 400,000. How much am I left with? Now, if I got those same returns, but just got them in reverse, so.

Mallory Boggs [00:33:54]:
It seems like the logical answer would be 400,000, which it was before 2.4 million. That is not the same. See, it sounds like it’s almost random. What is the difference?

Wes Moss [00:34:07]:
It’s because in the first example, the first three years were really bad. So you started out in a hole immediately because of your market return, and you were taking your $50,000 but the last three years, 1819 and 20 were down four, up 31, up 18. So we flipped the ladder upside down. So our first three years in the second example are really good. The first one is 18, the second year is 31 and a half. And then you get that. -4.4 but you’ve already boosted the portfolio right out of the gate. So exact same average rate of return.

Wes Moss [00:34:46]:
Two totally different numbers because of the sequence of when we got those returns. It’s called sequence of return risk. And that’s why the super nerds pointed out that using that 8% withdrawal rate, starting at a really bad time, 2000 money ran out really quickly by again taking this great debate from the pendulum is on one side it’s under 3%, on one side it’s all the way to eight. Guess what? What? I think the right answer is, and it’s a lot less bombastic, is somewhere in the middle. Four to four and a half. That’s why we call it the 4% plus. Rule of thumb, these debates are fun. It’s great to see these people argue and yell at each other.

Wes Moss [00:35:37]:
It’s fun for me to talk about. Mallory, you were awesome today. Thank you for being here. But in the end, I hope today gives you that confidence, that, look, if you’re planning in that range that we talked about, the 4% plus rule, you should feel pretty darn good that you’re able to max out what you’re taking out without running out.

Mallory Boggs [00:35:56]:
Hey y’all. This is Mallory with the retire sooner team. Please be sure to rate and subscribe.

Mallory Boggs [00:36:01]:
To this podcast and share it with a friend.

Mallory Boggs [00:36:03]:
If you have any questions, you can find us@westmoss.com that’s wesmoss.com. You can also follow us on Instagram and YouTube. You’ll find us under the handle Retire sooner podcast. And now for our show’s disclosure.

Mallory Boggs [00:36:17]:
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guaranteed offer that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible moss of principal. As interest rates rise, the value of fixed income securities falls. Past performance is not indicative of future results.

Mallory Boggs [00:36:57]:
When considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here. This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment tax, estate, or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether.

Mallory Boggs [00:37:29]:
Strategies will be successful.

Mallory Boggs [00:37:30]:
The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.