Dave Ramsey Says Retirement Principal Stays Untouched If You Withdraw Under 12% — But There’s a Catch

Quick Read

• Dave Ramsey says your principal will never be touched if you withdraw less than a 12% average return, but that overlooks how unevenly investment gains actually arrive.

• When weak years hit early in retirement, a $1 million portfolio can fall to around $718,000 even with a 12% average return; if strong years come first, the ending balance can stay near $1 million or more.

• The withdrawal rate is the factor you can control: the same market drop can permanently hurt a 10% withdrawal strategy, but only temporarily affect a 4% plan.

• Americans working with a financial advisor have saved more than twice as much for retirement on average. SmartAsset's free quiz can match you with up to three vetted fiduciary advisors in about five minutes. (Sponsor)

On an episode of The Ramsey Show, Dave Ramsey was asked how to draw money from a retirement account without depleting it. Ramsey, who hosts the debt-free personal finance program, offered a straightforward answer during the episode titled Make Decisions Based on Facts, Not Fear.

Ramsey said, "If it's making 12% and you pull off less than 12%, it will always be there. So you're never going to actually touch the million if you live on less than what it makes."

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Americans say they need about $1.46 million to retire comfortably. Whether that amount is enough for you depends on three questions many people never fully answer:

• 1. How much can you withdraw each year without running out?

• 2. When should you claim Social Security?

• 3. How much will taxes take from your 401(k) or IRA?

A fiduciary advisor can help you work through all three using your actual numbers. SmartAsset's free quiz matches users with up to three advisors who serve their area.

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Ramsey’s Logic Assumes Returns Arrive Evenly

Spending less than your portfolio earns is sensible. The problem is the assumption that it earns the same amount every year. Ramsey has made this point before. In one earlier appearance, he said that if you "make 12 and we pull off 8, we never touch" the principal. That math works if the investment pays a fixed 12%, such as a bond. Stock funds, however, produce an average return, and averages hide the order in which gains and losses occur.

Imagine retiring with $1 million and withdrawing $100,000 at the start of each year. That is a 10% withdrawal rate, comfortably below Ramsey's 12% threshold.

If the portfolio earns exactly 12% every year, you end the fifth year with about $1.05 million. In that case, Ramsey's point holds and the principal remains intact.

Now consider the same portfolio over five uneven years: down 20%, down 10%, then up 34% twice and up 22%.

Those five returns still average 12%, but they do not arrive in a smooth pattern.

After the first two bad years, the account falls to roughly $558,000. The $100,000 withdrawal now amounts to about 18% of what remains.

The three stronger years that follow help, but the account finishes around $718,000 after year five. The average return matched Ramsey's 12%, yet the principal still declined by more than a quarter.

If the sequence is reversed so that the strong years happen first, the same returns and withdrawals leave the account with about $1.06 million. That difference is known as sequence-of-returns risk: when shares are sold in a down market to cover living expenses, those shares are no longer available to benefit from the rebound.

A second issue lies in the word "average." Ramsey's 12% return pattern compounds at only about 10% annually. When returns swing up and down, a simple average can overstate how fast the money truly grows.

Your Withdrawal Rate Determines How Much Damage a Downturn Does

Market timing is beyond your control. The amount you withdraw is the one part you can control, and it matters a great deal.

Using the same rough sequence, but withdrawing $40,000 a year instead, the picture changes. After two down years, the balance is about $655,200. That still hurts, but each withdrawal takes a much smaller share of the account, leaving more investments in place for the recovery. By the end of year five, the portfolio climbs to roughly $1.23 million, above the starting balance.

The returns are the same in both examples. At a 10% withdrawal rate, an early decline causes permanent damage to the plan. At 4%, the same decline is only temporary. Ramsey's warning places the danger zone at 12%, but the math suggests the risk appears much sooner once returns stop coming in a straight line.

Recent market swings show how quickly that can happen. The VIX, Wall Street's gauge of expected volatility, reached 21.15 before easing. Even after the latest pullback, SPY remains up 9% for the year. Retirees who sold during the decline did not benefit from that recovery.

Ways to Test a Withdrawal Plan Before the Next Bad Stretch

1. Calculate your real withdrawal rate. Divide the amount you plan to pull from investments each year by your portfolio balance. That figure is what actually determines risk.

2. Test a bad-years-first scenario. In a spreadsheet, subtract your withdrawal, then apply a 20% loss in year one and a 10% loss in year two. Check how large the withdrawal becomes relative to the reduced balance. If the percentage rises far above your starting rate, the plan depends heavily on favorable timing.

3. Maintain a cash cushion. Keep about one to two years of planned withdrawals in cash or short-term bonds. After a sharp market drop, you can spend from that reserve instead of selling stocks at depressed prices.

4. Set a spending rule ahead of time. Decide now that after a down year you will reduce withdrawals or skip an inflation increase. Smaller cuts made early in a downturn protect more principal than larger cuts made later.

Ramsey's advice to live on less than your money earns is sound. The real test is what happens if several weak years show up first. Watch how much of your balance each withdrawal consumes after a loss, because that early stretch is what planners call sequence-of-returns risk.

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