Financial Knowledge All Adults Should Know?

[jtbell]

That's why I always kept several months' worth of expenses in my checking account, besides not having to watch out for overdrafts. I didn't call it a formal "emergency fund", just a "cash cushion."

Why checking instead of savings/money market, JT?

A long time ago (early/mid 1980s) I did have most of it in a money-market account. For a while, interest rates were sky high and for a few months I was getting interest at an annual rate of more than 18% . Then rates dropped and I probably decided it wasn't worth the hassle of shuffling money between accounts for the small returns I was getting. This was before it was possible to transfer money simply by logging into an online account and clicking a mouse. At some point that "cash cushion" became a small part of my assets anyway, as I continued to put money via payroll deduction into my tax-deferred retirement account at work.

I might be able to get $100-$200 in interest on my cash cushion if I put it somewhere besides a checking account, but we're pretty frugal otherwise which more than makes up for it. For example, we've always used a roof antenna for broadcast TV, instead of cable or satellite TV. That alone saves us several hundred dollars per year. We buy most of our groceries at Aldi, and my wife buys most of her clothes at thrift shops. Etc.

 

[Stavros Kiri]

My favorite advice along these lines is "Buy a stock. When it goes up, sell it. If it doesn't go up, don't buy it."

This is kind of enigmatic and I hope you realize it's just a figure of speech. E.g. you either have to be a prophet (to predict if it will go up or not) or have specific means and criteria to make such predictions. Unless stating those such means and criteria such an advice is useless! (I am talking about the third part)

Also, from the mathematical standpoint, even the second part ("When it goes up, sell it.") is inaccurate. Better yet, unless stating 'how much up' it can be a bad advice! (Without knowing and predicting the expected/anticipated tendency ... and/or 2nd derivative ...)

But in any case I think I know what you mean ... as a pun (or figure of speech).

 

[Vanadium 50]

<foghorn leghorn>
Son, I say, son, it's a joke son. Am I going too fast for y'all?
</foghorn leghorn>

 

[Stavros Kiri]

Ah, ok

 

[kyphysics]

Back with two questions for the financial chat gang here!:

1.) Cost of homeownership - Does anyone know if there's a formula for determining how much it costs a person a year in "hidden fees" to own a house (vs. just renting). Some things I know you have to keep in mind are:

a.) homeowner's insurance
b.) property taxes
c.) upkeep, repairs, and prevention (lawn, broken fixtures and structures, termite inspections, etc.)

What else might you have to pay for that would be unique to owning a home versus just renting somewhere? And is there a "formula" (even if a general one) for determining how much you'll be paying each year for these home costs? Say you have a three bedroom house in an average suburb in middle America (let's say it's worth $250,000). Would you say $5,000/year is adequate to cover everything you'd need (i.e., stuff like the above listed)?

2.) This was something a friend and I talked about over lunch today in a cool hypothetical (although, for him, it's possibly a real situation). He's not interested in kids, nor marriage and wants to save up lots of money quickly to reach $xxx,xxx.00 so that he can possibly just live off of the interest on investments. I thought that was pretty interesting, albeit odd. He doesn't mind not even having a home, but is open to one too. But, basically, he said if he had $500,000, he'd feel comfortable quitting his job and living off the investment money (10% per year = $50,000).

How possible would something like this be? I.e., Suppose someone just gave me $500,000. Could I literally not work at all and just live off the 10% ($50,000) interest forever? Brought this up with another friend, who said he'd quit his job at $750,000 and just live off the interest. He'd feel $75,000 would be minimum for his lifestyle and needs.

What if everyone did this in America? Who would work anymore?

 

[Stephen Tashi]

How possible would something like this be? I.e., Suppose someone just gave me $500,000. Could I literally not work at all and just live off the 10% ($50,000) interest forever?

These days getting 10% interest is unlikely. Also interest income is taxed.

As to living off $50,000 a year, in most parts of the USA you could do that if you had nobody else to support and no major debts.

 

[kyphysics]

These days getting 10% interest is unlikely. Also interest income is taxed.

As to living off $50,000 a year, in most parts of the USA you could do that if you had nobody else to support and no major debts.

I know this is going to kill Russ Waters, Vanadium, and NTL, but Dave Ramsey says you should expect 10% growth (maybe it's not technically interest/compound interest, but the same idea) in investments annually if you're smart about it. He says if you're not easily getting 10%, then there's something wrong.

His mutual fund strategy has netted him 10% annually for decades. Is that a standard yield?

True, you'd have to pay capital gains taxes, but you'll be taxed at a lower percentage than with "normal" income. 15% isn't too bad, imo, for profits off of investments. The same $50,000 in salary through a normal job would get taxed worse in the upper margins.

re: COL ...Yeah, stay out of California with that salary! My family used to live there and my older brother taught math in Los Angeles for several years (he's even poorer now as a Ph.D. student lol). Most non-big city areas should be fine. One massive draw-back to this retire early and live off of investment income is the gap in your resume if you ever decide to return to work after 2+ years. If you somehow lost your investment money down the line, then you could be in some trouble.

 

[DrDu]

If you read the beginning of this thread you will have noticed the following rule: Interest is what you get for taking a risk

 

[MarneMath]

I would say the number you would reasonably need is near 1 million to honestly live off of your interest. First, 10% year after year growth is absurd. Does it happen sure. Does it happen reliably? When you want to live off of your saved money, you typically want your assets to be more focused towards annuities. You can expect somewhere between 2-3% return on bonds and cd's and probably 4% on dividends with blue chip type stocks. Either way, you're still a long way from that 10% you're looking for.

With that said, if you're risk hungry you can choose to make riskier moves and creep closer to the 10% goal, but with that risk comes the potential of losing significant assets depending on the year.

 

[NTL2009]

I know this is going to kill Russ Waters, Vanadium, and NTL, but Dave Ramsey says you should expect 10% growth (maybe it's not technically interest/compound interest, but the same idea) in investments annually if you're smart about it. He says if you're not easily getting 10%, then there's something wrong.

His mutual fund strategy has netted him 10% annually for decades. Is that a standard yield? ... .

Well, I'm glad you posted this. If this doesn't stop you from listening to Dave Ramsey, nothing will. He is just plain flat out wrong on basic financial facts. Not opinion, not viewpoint, not strategy - facts. Why listen to a financial 'guru', who either doesn't know what he is talking about, or is lying to you? Does Dave publish his history in those funds for review?

OK, fact is you just cannot count on getting 10% annually. Instead of listening to gurus, or asking people on a forum, look it up yourself. You need to depend on yourself, not other people. An old saying is, 'no one cares more about the safety of your money than you do'.

Look here: https://goo.gl/krWdV6 and https://goo.gl/vYLhfw

So I just went back 20 years. The total stock market returned 6.95% - that's a long ways from 10%. And no, picking different funds/stocks will not reliably get you above that figure (google "active versus passive investing" for many well done studies).

And most retirees would be uncomfortable with 100% in the stock market, most will have some in bonds to provide a cushion in a downturn. A 60/40 Stock/Bond portfolio returns a slightly lower 6.5% (and almost half the volatility).

So if you tried to draw 10% annually, inflation adjusted, 20 years ago, you'd end up with $0 if you were 100% in stocks, and just $43K if you were 60/40 (not enough for next year's withdrawals). So imagine you took DR's advice 20 years ago? Or today, and the future ends up looking pretty much like that? Ouch!

... But, basically, he said if he had $500,000, he'd feel comfortable quitting his job and living off the investment money (10% per year = $50,000).

How possible would something like this be? I.e., Suppose someone just gave me $500,000. Could I literally not work at all and just live off the 10% ($50,000) interest forever? Brought this up with another friend, who said he'd quit his job at $750,000 and just live off the interest. He'd feel $75,000 would be minimum for his lifestyle and needs. ...

See above.

I've read many studies on this, and there are some tools out there you can play with that use historical data (google firecalc and cfiresim for two). To not have run out of money for any 40 year period in US history (data goes back to 1871), a 3.2% inflation adjusted withdrawal is about all you can do. And a young person would need to plan for longer - though 3.2% seems to become asymptotic.

 

[NTL2009]

Back with two questions for the financial chat gang here!:

1.) Cost of homeownership - Does anyone know if there's a formula for determining how much it costs a person a year in "hidden fees" to own a house (vs. just renting). Some things I know you have to keep in mind are:

a.) homeowner's insurance
b.) property taxes
c.) upkeep, repairs, and prevention (lawn, broken fixtures and structures, termite inspections, etc.)

What else might you have to pay for that would be unique to owning a home versus just renting somewhere? And is there a "formula" (even if a general one) for determining how much you'll be paying each year for these home costs? Say you have a three bedroom house in an average suburb in middle America (let's say it's worth $250,000). Would you say $5,000/year is adequate to cover everything you'd need (i.e., stuff like the above listed)? ...

I don't think generalities/averages will be of much help to you. These things vary widely by area, and the specific building (age, condition, environment) and your own personal wants/needs.

Though it is certainly useful to try to estimate them for yourself, they are significant, and should not be ignored. I've done some estimating with a spreadsheet, and put in estimates based on the current conditions like (made up examples here): HVAC replacement in 5 years, new roof in 15 years, WH, washer/dryer in 7 years, new kitchen appliances and outside house painting in 12 years, and any other big things you can estimate. Then throw in an annual factor for the smaller misc. Then factor in what it will take to support that (with some buffer if something happens sooner than estimated). It won't happen exactly that way, but it gives you something to review, and is better than nothing.

 

[jtbell]

But, basically, he said if he had $500,000, he'd feel comfortable quitting his job and living off the investment money (10% per year = $50,000).

Dave Ramsey says you should expect 10% growth

Absolute BS. We've had a pretty good run the past 9 years, but nobody expects it to continue forever. Play around with Firecalc a bit. It uses historical data going back to 1871 IIRC. If nothing else, it will give you an impression of the huge range of possible outcomes for a given initial portfolio value and withdrawal rate.

A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US. The worst case would have been retiring in the late 1960s, just before the period of stagnant stock market and high inflation that lasted until the early 1980s. Longer periods require lower withdrawal rates, but it bottoms out around 2% to 2.5%. It isn't super sensitive to the % of stock in the portfolio, maybe 50%-75%.

In this context, "withdrawals" means both collecting any dividends and interest, and selling shares or withdrawing cash as necessary.

 

[Vanadium 50]

Would you say $5,000/year is adequate to cover everything you'd need (i.e., stuff like the above listed)?

Your guru Dave Ramsey has apparently left you so financially dependent that you can't find this out on your own. A quick Google shows that the average property tax bill is $3300 and the average homeowners insurance bill is $1200, leaving you $1.40/day for everything else on your list.

As far as being able to take 10% out every year, Mr. Ramsey is leading you astray here as well. The S&P growth over the last 20 years has been 7.16%. (As an aside, he would say it's 8.36% because he averages the annual returns rather than compounds them. I don't know if he does this because he is dishonest or merely innumerate - or which is better for a guru.)

If you started with $500,000 twenty years ago, invested it in the S&P 500 and withdrew $50,000 per year, you would have run out of money in 2012. If you took his 8.36% number instead of 10%, you'd last until 2017. If you want to make it to 2018 with $500,000 in buying power remaining, you can only take out about $28,500. In short, if you take his advice you will end up bankrupt.

"I help people with their investments, until there's nothing left" - Woody Allen

 

[NTL2009]

Absolute BS. ...

:) I tried to be a bit gentler and more politically correct, but I think sometimes concise/direct is better!

... A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US. ...

To put a finer point on that, the "4% guideline" includes ~ 5% failures. To get to a 100% historically successful portfolio, you are closer to ~ 3.4%. Of course, the future could be worse than the worst of the past, but it at least gives us some yardstick (meter-stick?).

... The worst case would have been retiring in the late 1960s, just before the period of stagnant stock market and high inflation that lasted until the early 1980s. Longer periods require lower withdrawal rates, but it bottoms out around 2% to 2.5%. It isn't super sensitive to the % of stock in the portfolio, maybe 50%-75%.

In this context, "withdrawals" means both collecting any dividends and interest, and selling shares or withdrawing cash as necessary.

Yes, I also found it interesting that for longer periods, there just has not been much sensitivity to the % of stock in the portfolio. I see some people debating this and sweating out a few % difference. I've joined the "What, me worry?" camp in this regard. I rarely ever re-balance, just let things ride. Results don't really look much different until you get down below ~ 35% in stocks. Which I find kind of funny, because some proclaimed 'conservative' investors say they keep their stock ratio very low, maybe even zero. But they are actually taking on more risk of their portfolio failing. Is that really 'conservative'? They commonly confuse 'volatility' with 'risk' - unfortunately, those terms are used interchangeable in the financial world, but they are very different.

 

[Stephen Tashi]

but Dave Ramsey says you should expect 10% growth (maybe it's not technically interest/compound interest, but the same idea)

It's not the same idea if Ramsey is talking about 10% growth to your initial holdings at the end of , say, 15 years, and you are expecting 10% growth on your initial holdings each year.

in investments annually if you're smart about it. He says if you're not easily getting 10%, then there's something wrong.

Ramsey may be referring to 10% growth, averaged over a decade. He may (or may not) be correct about that figure. However, if you take your gains as income each year there could be some years where you do better than 10% and some years where you do worse. So it becomes a "cash flow" problem. What happens in a lean year? What happens if the first year you try the scheme is a lean year? You might load yourself down with credit card debt.

His mutual fund strategy has netted him 10% annually for decades. Is that a standard yield?

I don't know. That could be answered as a historical question. We are in a period where the way markets work is undergoing radical changes. History may not be a good guide.

True, you'd have to pay capital gains taxes, but you'll be taxed at a lower percentage than with "normal" income. 15% isn't too bad, imo, for profits off of investments. The same $50,000 in salary through a normal job would get taxed worse in the upper margins.

Unless you plan to do without Social Security and Medicare in your over-60's years, you have to figure out a way to make contributions to those programs.

 

[kyphysics]

Absolute BS. We've had a pretty good run the past 9 years, but nobody expects it to continue forever. Play around with Firecalc a bit. It uses historical data going back to 1871 IIRC. If nothing else, it will give you an impression of the huge range of possible outcomes for a given initial portfolio value and withdrawal rate.

A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US. The worst case would have been retiring in the late 1960s, just before the period of stagnant stock market and high inflation that lasted until the early 1980s. Longer periods require lower withdrawal rates, but it bottoms out around 2% to 2.5%. It isn't super sensitive to the % of stock in the portfolio, maybe 50%-75%.

In this context, "withdrawals" means both collecting any dividends and interest, and selling shares or withdrawing cash as necessary.

I'll take a look at the historical data and see what else Ramsey is doing with his mutual funds.

NOTE***: Ramsey doesn't say to do this. This was my friend, who wants to retire early and just enjoy life. He started hypothesizing what amt. of money he'd need to live off the interest alone. The only thing Ramsey said was that you should average 10% in investment profits/year over the long haul (he does acknowledge ups and downs in the short-term) and that if you'e not averaging that, then there's something wrong with your investment strategy. He uses his decades of mutual fund investments as "proof."

Where I think my friend goes wrong is also COL increases (inflation essentially) that have grown dramatically. It's gotten out of whack since the early 1970's to 2018. The COL-to-wages ratio was much more propitious for the middle (and even lower) class in the U.S. prior to the 1970's. Post campaign finance reform law changes in the 1970's (Buckley v. Veleo and also the famous Belloti corporate "free speech" ruling) that have gotten worse every decade since and culminated in 2010's Citizen's United ruling (putting legal political bribery on steroids in the U.S. with SuperPacs), we've seen the rich and corporations rig the system more and more in their favor (killing unions, stripping the social safety net, giving the rich and corporations tax breaks, and allowing for stagnant wages while production has gone up). I see $40K as minimum to live in the U.S. without being in a ghetto, but that's increasingly getting worse with rising costs to all the fundamentals (housing, healthcare, and transportation).

Good thing McDonald's dollar menu is still $1.00. They actually lose money on $1.00 menu items, but hope you'll buy other stuff when you're there.

 

[NTL2009]

I'll take a look at the historical data and see what else Ramsey is doing with his mutual funds.

NOTE***: ... The only thing Ramsey said was that you should average 10% in investment profits/year over the long haul (he does acknowledge ups and downs in the short-term) and that if you'e not averaging that, then there's something wrong with your investment strategy. He uses his decades of mutual fund investments as "proof." ...

So have you looked into this? What did you find? Is it reasonable to say if you are not averaging 10% returns you are doing something 'wrong'? Or is it BS from a BS-er (dropping political correctness, as this is getting tiring)?

The advice you keep getting from this forum is the "teach a person to fish" method. You are looking for people (financial 'gurus') to give you answers (fish - the noun). You need to learn how to find answers on your own (learn to fish - the action/verb). Some of the fish you are being given are rotten, they stink to high heaven! But you don't know that, you just accept what they give you.

Learn to 'fish'.

 

[kyphysics]

So have you looked into this? What did you find? Is it reasonable to say if you are not averaging 10% returns you are doing something 'wrong'? Or is it BS from a BS-er (dropping political correctness, as this is getting tiring)?

The advice you keep getting from this forum is the "teach a person to fish" method. You are looking for people (financial 'gurus') to give you answers (fish - the noun). You need to learn how to find answers on your own (learn to fish - the action/verb). Some of the fish you are being given are rotten, they stink to high heaven! But you don't know that, you just accept what they give you.

Learn to 'fish'.

Not yet. I'm dealing with mold issues and fungus (the latter making me feel miserable this weekend, but don't ask).

Why do you keep saying that I blindly accept a "guru's" advice? I didn't do that in my post. I asked about it above to see if there was any validity to it (quite the opposite) and as a conversation starter. But, back to the topic at hand, here's what Ramsey says:

So, let's see. If you were to invest $100 a month from age 25 age 65 or age 30 to age 70. 40 years. $100 a month. Let's put it in a Roth IRA, so that it grows tax free. And I'm going to recommend a good growth stock mutual fund that has an average annual return of 12%. I own one that's done that for over 75 years. Average. Now some years it makes 18% and some years it makes 4%. But the average annual return is about 12% for 75 years. So, let's just say you did that...And I've done it. My 401K has been funded, my Roth IRAs have been funded, and anything else I can fund has been funded. Because even though I'm a natural spender, I figured out I would have more to give and more to live if I saved and invested. And I've done a lot of that in good growth stock type mutual funds. Now, were you doing that in the growth stock mutual fund, were it to average 12%, were you to put a $100 a month in. Now what do you spend $100 on? I'll guarantee you this. 95% of you listening to me right now do not do a unique written budget every month unique to that month. Almost no one does. Those that do, however, find all kinds of money that's being lost. Because your checking account is a freaking sieve. Money leaks out of it like you're sending it to Congress or something. You have no idea where your money goes. And you make more than your parents made and you make more than a lot of your friends make. And you make more than any other country in the world virtually - personal income. And you're freaking broke. Let's just establish here that you can find $100 latte breath. Let's establish that you can find $100 Mr. and Mrs. Cable. You spend $100 on things you don't even realize you did it. You impulse more than $100 at Target every month...

A hundred dollars invested every month - every month - from age 25 to age 65 averaging 12% in a good growth stock mutual fund Roth IRA is $1,176,000. So, if you're listening to this show and you're under 40 years old and you don't retire with a million dollars that's no one's fault but your's. It's YOUR FAULT in this country if you retire broke...

For every one of you listening to not retire a millionaire is absurd. IT'S ABSURD! Average household income in America today is $50,000. If you save 15% of that, that's $7,500 a year. If you do that in your 401K with no match into Roth IRAs into good growth stock mutual funds, you would retire with around $7,500,000 if you save 15% of your income...So, maybe I'm wrong: $7,500,000. Let's say I'm half wrong, so you end up with $3,000,000. SHUT UP! SHUT UP! Maybe you can't save 15% of your income, because you're so deeply in debt and you've not followed these steps to get out of debt. Well, then follow the steps to get out of debt so that you can...Let's say that I'm 90% wrong, because you're a loser. Let's just call it that. You're a loser. And I'm 90% wrong. That's $750,000 you would have, which is a whole heck of a lot more than social insecurity.

Transcribed half of his rant above for Russ Watters' sake (IIRC, his mobile device won't play these vids) and convenience of quoting later. This is what I was referring to, but he's also got other advice on picking mutual funds elsewhere. And he's talk about 10% returns in other advice vids too.

The major push back I've seen from listeners is his 12% rate. People agree on the importance of saving and investing early and other advice he gives. But, I mostly see people question the 12% returns figure.

I think Ramsey's not factoring in cost of living: wage ratio changes since he was growing up and working. Adjusted for inflation, the same dollar bought a lot more back then. The increase in costs to college (often resulting in debt) are a bigger disadvantage for us millennials too.

 

[NTL2009]

OK, after I posted, I realized you are questioning it, but... it's to the tune of 'accepting it until we prove it wrong'. That's not healthy. Question it upfront.

You can do the research on that - why do you keep looking for us to do it? Here's what I (and you could have) easily found:

https://seekingalpha.com/article/3101496-dave-ramseys-12-percent-return-strategy-is-replicable

Now to defend Dave. If one listens to him carefully, he often refers to a mutual fund that has averaged 12% since 1934. All of my conversations with professionals in the field leads one to conclude that he is talking about American Funds' Investment Company of America (MUTF:AIVSX). Started in 1934, the ICA has averaged a 12.13% annual return since inception. When Dave says there is a mutual fund that has averaged 12% since 1934, he is telling the truth. To validate his claim, the Pioneer Fund (MUTF:PIODX) has averaged 11.88% since 1928, so there is evidence to prove Dave's thesis.

So plug those funds in for the past 20 years, with a 10% inflation adjusted withdrawal:

https://goo.gl/xnTu8F

And you are broke, or close to it. In 20 years. A young person needs to plan on a much longer time span. Is Dave (or his heirs) going to let you move in with him, and feed you if you are broke in 20 years?

And w/o the withdrawal:

https://goo.gl/VsVzJc

You get 7.34% and 6.03% returns (5.04% and 3.76% inflation adjusted), far from 10% (and you need better than that to w/d 10% inflation adjusted, and you cannot ignore inflation over 20 years or more).

Now here's the real question:

We have given you links to tools like this. Why don't you use them and tell us what you found, instead of quoting Dave Ramsey and asking us why we shouldn't believe him?

Time for you to go fishing. Good luck. The fishing is good if you put in a little effort.

 

[Vanadium 50]

Good thing McDonald's dollar menu is still $1.00. They actually lose money on $1.00 menu items, but hope you'll buy other stuff when you're there.

Source, please.

Getting back on track.

AIVSX has over the last decade, done just slightly worse than the S&P 500 - nowhere near 12%. Over the last 30 years, it has done much worse. I am willing to believe in 12% since inception, but of course that means that it started at the nadir of the Great Depression and most of the gains were half a century ago.

It might be instructive to look at why this model fails.

Start with $500,000 in 1998. S&P is up 29.63%, so you have $648,000. Woo hoo! Take out $50,000 and you have $598,000.
Next year the market is up 14.16%, so after my $50K, I have $633,000. This is working great!
The next year the market is down 6.31%. OK, they can't all be winners, but I still have $542,000.
The year after that is pretty bad - down 14.63%. I'm left with $413,000. The bear market can't go on another year, can it?
I guess it can: down another 21.43%. Down to $274,000.
Ah, great - the market is up again! Up 26.42%! My troubles are over. Wait...I only have $294,000.
Next years are up 4.32%, 8.24% and 11.34% and the market is where it was before the downturn. How much do I have? $208,000.

You run out of money in 2011, when the market is actually slightly up.

What happened?

When the market fell, instead of taking 10% out, now you're taking 18% out. You can't recover from that. And, as NTL's tools show, you don't. Firecalc shows this fails 98+% of the time (for 30 years, and 100% of the time for 34 years).

I'm going to suggest a different tactic. Kyphysics, please do exactly what Dave Ramsey tells you to. That means you'll be selling at the bottom of the market - and who will you be selling to? Me, or someone like me. This is a golden opportunity for someone to make a lot of money: buy stocks you're selling at the bottom. Your strategy essentially hands your retirement nest egg to those of us who adopted a strategy of working longer, spending less, and having a sane investment plan, and I'm OK with that. Sure, it means that I'll be dining on champagne and caviar while you'll be grateful to find a can of Alpo, and based on your past posts, you'll be more likely to attribute this to "being screwed by the millionaires and billionaires" rather than your own bad decisions, but I can live with that. Because I will have all your stuff, thanks to Mr. Ramsey.

 

[jtbell]

A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US.

I should have actually tried Firecalc for this scenario. Using a starting value of $1,000,000 and a first-year withdrawal of $40,000 (4.0%) I get five failed 30-year periods out of 117, starting in 1965-69 and 1973.

A 3.7% initial withdrawal gives me one failure, starting in 1966.

A 3.5% initial withdrawal never fails, at least for 30-year periods starting 1871-1987. Firecalc's data currently runs through 2016.

The 4% figure comes from studies done in the early 1990s IIRC, so their 30-year periods would not have included the ones that Firecalc fails on. There's also probably some variation depending on the makeup of the portfolio. Firecalc's default is 75% stock (total-market index funds), but you can change this in one of the tabs.

A 10% initial withdrawal rate fails 115 out of 117 times.

 

[Vanadium 50]

A 10% initial withdrawal rate fails 115 out of 117 times.

So you say there's a chance!

Firecalc's default is 75% stock (total-market index funds), but you can change this in one of the tabs.

You can also see how this allocation changes the outcome. I was surprised by how flat this was: 75-25 or 50-50 makes relatively little difference. What does matter, though (unsurprisingly) are the fees. Mr. Ramsey's AIVSX charges a load of 5.75% and expenses of 0.58%. Compare with a Vanguard index fund (VFAIX) that slightly outperforms it at zero load and expenses of 0.04%.

 

[kyphysics]

You can do the research on that - why do you keep looking for us to do it? Here's what I (and you could have) easily found:

https://seekingalpha.com/article/3101496-dave-ramseys-12-percent-return-strategy-is-replicable

I'm not asking for you (or anyone) to "do it" for me. I'm just posing stuff as conversation starters. If you don't want to chime in, no problem.

I guess I'm viewing this much more lightly than you or others perhaps and less formal. Like, this isn't homework section of Physics Forums, where I feel the need to put work into solving something (certainly not with an urgent time limit on it, at least), but rather a casual chat section. I throw stuff out there for convo. starters. It's casual in nature - key word.

And, no, I haven't researched a lot, because I'm preparing for an internship that starts literally in four days (I'll be gone from PF for a few months - yay me!).

I don't click on random links I'm not familiar with, so I can't click those right now. But when I have time later (maybe a few months later!), I'll look into all of this stuff. I have to read up on taxation of stocks/dividends income. Not sure how it works fully (though I know a little). My big issue with my friend's idea is that you can't really control for market volatility in a short time period. Another poster mentioned this too earlier. What happens if the market dives 20% over 2 or 3 years?

Thus, I don't feel $500,000 is enough. Another poster said $1,000,000 would be a starting point and that sounds more sane.

ETA: As I noted earlier, Ramsey never recommended this. It was a friend who talked about trying to do something like this.

Also, I saw this article from Ramsey's website:

https://www.daveramsey.com/blog/the-12-reality

Look like a scam?

Return on Investment; the 12% Reality

4 MINUTE READ
You may have heard the phrase, “12% return on investment.” And whether you first heard Dave mention it in Financial Peace University or you read it on daveramsey.com, it was undoubtedly followed by questions.

But most of those questions boil down to two important ones:

Can you really get a 12% return on mutual fund investments, even in today’s market?

If so, what mutual funds should you choose?

We’ll answer those questions, but let’s cover a couple of other questions first.

Where Does the Idea of a 12% Return on Investment Come From?
When Dave says you can expect to make a 12% return on your investments, he’s using a real number that’s based on the historical average annual return of the S&P 500.

The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the New York Stock Exchange—it’s often considered the most accurate measure of the stock market as a whole.

The current average annual return from 1923 (the year of the S&P’s inception) through 2016 is 12.25%.(1,2) That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.

So let’s look at some numbers that are closer to home. From 1992 to 2016, the S&P’s average is 10.72%. From 1987 to 2016, it’s 11.66% In 2015, the market’s annual return was 1.31%. In 2014, it was 13.81%. In 2013, it was 32.43%. (3)

So you can see, 12% is not a magic number. Based on the history of the market, it’s a reasonable expectation for your long-term investments. It’s simply a part of the conversation about investing.

But What About the “Lost Decade”?
Until 2008, every 10-year period in the S&P 500’s history has had overall positive returns. However, from 2000 to 2009, the market endured a major terrorist attack and a recession. S&P 500 reflected those tough times with an average annual return of -1% and a period of negative returns after that, leading the media to call it the “lost decade.” (4)

But that’s only part of the picture. In the 10-year period right before that (1990–1999) the S&P averaged 18% annually.(5) Put the two decades together, and you get a respectable 8% average annual return. That’s why it’s so important to have a long-term view about investing instead of looking at the average return each year.

But that’s the past, right? You want to know what to expect in the future. In investing, we can only base our expectations on how the market has behaved in the past. And the past shows us that each 10-year period of low returns has been followed by a 10-year period of excellent returns, ranging from 13% to 18%!
If You Are on the Fence About Investing . . .
Will your investments make that much? Maybe. Maybe more. But the idea is that you invest for the long haul. Following Dave’s investing philosophy has inspired tens of thousands of Americans to start investing in order to reach their long-term financial goals

Don’t let your opinion about whether or not you think a 12% return is possible keep you from investing.

Related: How to Hire a Financial Advisor

How to Invest in Mutual Funds
It’s not difficult to find several mutual funds that average or exceed 12% long-term growth, even in today’s market. An investing professional can help you find the right mix of mutual funds.

But the value of a professional doesn’t end there.

The stock market will have its ups and downs, and the downs are scary times for investors. They react by pulling their money out of their investments—that’s exactly what millions of investors did as the market plunged in 2008. But that only made their losses permanent. If they’d stuck with their investments like Dave advises, their value would have risen along with the stock market over the next two years. This is yet another value of a professional—they can help you keep your cool in tough times and focus on the long term.

In fact, increasing your investments during down markets may help drive total return on investment in your portfolio. It’s important not to be scared by the short term (or chase performance spikes). Remember, investing is a marathon—it takes endurance, patience and will power, but it will pay off in the end.

Discuss your investing concerns and goals with an investment professional in your area today!

 

[Rive]

Look like a scam?

Yes.

Well, the most shocking and useful revelation for me was when I finally understood that most of the so called 'experts' are actually selling the market itself instead of trading in any instruments, stocks, commodities or currencies.

That guy exactly doing just that. Selling the market.
I have to admit, he is good in marketing.

 

[russ_watters]

I'm not asking for you (or anyone) to "do it" for me. I'm just posing stuff as conversation starters. If you don't want to chime in, no problem.

I guess I'm viewing this much more lightly than you or others perhaps and less formal. Like, this isn't homework section of Physics Forums, where I feel the need to put work into solving something (certainly not with an urgent time limit on it, at least), but rather a casual chat section. I throw stuff out there for convo. starters. It's casual in nature - key word.

The problem with that approach is that this is a serious subject and this thread is intended for serious discussion of it. If you can't provide anything better than clickbait, then you shouldn't be posting in it.

 

[Stephen Tashi]

The problem with that approach is that this is a serious subject and this thread is intended for serious discussion of it.

We should give the original poster some say in what the thread is intended for!

 

[russ_watters]

We should give the original poster some say in what the thread is intended for!

Granted, though the wording of the OP sounds like it was intended to be serious and most of us treated it that way. Frankly, I don't think we would have left the thread open if it was just intended to be a clickbait dumping ground.

 

[Vanadium 50]

I guess I'm viewing this much more lightly than you or others perhaps and less formal.

This is perilously close to "You shouldn't have taken me seriously; I was just messin' with you." Are you sure this is the path you want to go down?

So let’s look at some numbers that are closer to home. From 1992 to 2016, the S&P’s average is 10.72%.

On January 1, 1992 the S&P 500 was at 416.08. On January 1, 2016 it was at 1918.60 and on December 31, 2016 it was at 2275.12, for an average annual return of 6.58% and 7.03% respectively. Not the 10.72% that Guru Ramsey claims.

 

[StoneTemplePython]

On January 1, 1992 the S&P 500 was at 416.08. On January 1, 2016 it was at 1918.60 and on December 31, 2016 it was at 2275.12, for an average annual return of 6.58% and 7.03% respectively. Not the 10.72% that Guru Ramsey claims.

You'd probably want to add a couple points to that to account for the dividend yield. A nice summary graphic is here:
http://www.multpl.com/s-p-500-dividend-yield/

- - - -
Coincidentally, inflation has been around 2% over this time. So if you are estimating real returns, for back of the envelope purposes, the numbers net.

- - - -
I strongly suspect Dave Ramsey has money illusion and doesn't consider inflation very much.

 

[Stephen Tashi]

On January 1, 1992 the S&P 500 was at 416.08. On January 1, 2016 it was at 1918.60 and on December 31, 2016 it was at 2275.12, for an average annual return of 6.58% and 7.03% respectively. Not the 10.72% that Guru Ramsey claims.

Maybe Ramsey is thinking about "compound average growth rate" instead of "average annual return".

You'd probably want to add a couple points to that to account for the dividend yield.

Yes. More complications!

 

[Vanadium 50]

According to the financial professionals who attempt to reproduce his number, the 12% is the average of the annual gain or loss. e.g. if you are up 50%, down 50% and up 15%, he would claim the average gain is 5%, even though you are down almost 14%. And presto! A loss becomes a profit.

 

[NTL2009]

OP may have packed it up, but for any other followers, we can put a sharper point on some of these numbers...

Maybe Ramsey is thinking about "compound average growth rate" instead of "average annual return". ...

According to the financial professionals who attempt to reproduce his number, the 12% is the average of the annual gain or loss. e.g. if you are up 50%, down 50% and up 15%, he would claim the average gain is 5%, even though you are down almost 14%. And presto! A loss becomes a profit.

Exactly, and this can be clearly demonstrated using the same calculator that Dave Ramsey references as his source for those numbers. That calculator provides both "Average" (and even there, "Average" is put in "quotes"! ), and Annualized return (= True CAGR) - w/o any "quotes".

http://www.moneychimp.com/features/market_cagr.htm

So we plug in 2008(Jan)-2011(Dec) and we get an "Average" positive return (gain) of 1.71%, while in real life, we would have experienced a negative True CAGR (loss) of 1.65% (-1.65%). A dollar 'grew' to $0.94. Hey, where did that 1.71% "gain" go! I want my money!

And for 2007-2011 we get an "average" of +2.46%, compared to a true loss of -0.27%. A dollar 'grew' to $0.99. Hey, where did that 2.46% go! I want my money!

It's been mentioned as a 'defense' that Dave's target audience is not the sophisticated investor - so shouldn't Dave be pointing out to these beginners that "Average" isn't a meaningful number to use? Why doesn't he do that (answered below)? I mean, assuming you want to actually use money to do things like, I dunno, put food on the table, rather than look at a phony number on a spreadsheet.

kyphysics said: ↑
Look like a scam?

Yes.

Unfortunately, I have to agree. I took a closer look at the links that OP posted. They really are a lot like 'click-bait'. For example, a link that says "How to Choose the Right Mutual Funds", or "How to Invest in the Right Mix of Mutual Funds" don't really do that, and they don't list the funds Dave says he uses so you can look for yourself. They take you to web pages of Financial Advisors selling their services.

And these FAs give this sort of advice, offered up unequivocally: "I recommend front-end load funds. With this type of fund, you pay fees and commissions up front when you make your investment."

You would be hard pressed to find any respected independent source recommend paying a front-end load (that just takes away money for growth, forever). That is terrible advice for the consumer, good advice for the FA to separate the consumer from their money.

And Dave's use of "Average" returns, which are misleading and not meaningful and used to Dave's advantage is more evidence of his putting the "sell job" ahead of the people he is supposedly helping.

Yep, it's pretty scam-my, and it is sad that the OP has not seemed to recognize this. Oh well, maybe he will come around. Maybe this thread will serve to educate others. We can only hope.

 

[CWatters]

I know it's easy to find free historic data for the major stock market indices but can anyone point me to a free source of "Total Return" data? I'm looking for data for any of the major indices back to 2003 or earlier.

Edit: Ah I see the link above (http://www.moneychimp.com/features/market_cagr.htm) has S&P 500 data.

 

[StoneTemplePython]

According to the financial professionals who attempt to reproduce his number, the 12% is the average of the annual gain or loss. e.g. if you are up 50%, down 50% and up 15%, he would claim the average gain is 5%, even though you are down almost 14%. And presto! A loss becomes a profit.

$GM \leq AM$ strikes again!

(There was a great xkcd comic about this, around a decade ago circa financial crisis, I'll see if I can find it.)

 

[BWV]

This is a good free source for LT global financial asset returns (1900-2017) for most developed countries.

The US real total stock return was 6.5% annualized from 1900-2017, which outperformed the global return of 5.2%

https://www.credit-suisse.com/media...a/media-release/2018/02/giry-summary-2018.pdf