Dave Ramsey Says You Can Leave Retirement Principal Untouched by Spending Below 12% — But There’s a Catch

Dave Ramsey argues that if your portfolio earns more than you withdraw, your principal should remain intact. But the same average return can look very different when the market’s ups and downs arrive in a different order.

This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.

On a recent episode of The Ramsey Show, a listener asked how to take money from a retirement account without draining it. Ramsey, the debt-free personal finance host, offered a straightforward answer on 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.”

But the market pushed back the same day. The SPDR S&P 500 ETF (NYSEARCA:SPY) fell 4% in one session, in what Reuters described as a “market bonfire.” Sharp declines like that expose the weakness in Ramsey’s approach. If withdrawals are based on that kind of math and early retirement years bring losses, principal can fall quickly — and recovery is never guaranteed.

Ramsey’s Logic Depends on Smooth, Even Returns

Spending less than a portfolio earns is sensible. The problem is the assumption that returns show up evenly every year. Ramsey has made a similar point before. In one earlier exchange, he said that if you “make 12 and we pull off 8, we never touch” the principal. That logic works for a bond paying a fixed rate, but stock funds only deliver an average, and averages hide the timing of gains and losses.

Consider a retirement account starting at $1 million with $100,000 withdrawn at the start of each year. That represents a 10% withdrawal rate, which is below Ramsey’s 12% benchmark.

If the portfolio truly gained 12% every year, the account would still end the five-year stretch at about $1.05 million. In that best-case scenario, the principal would indeed remain essentially intact.

Now imagine the same five-year period unfolds unevenly: down 20%, down 10%, then up 34% twice and up 22% once.

Those returns still average 12%, but they do not arrive in a straight line.

After the first two down years, the account has dropped to about $558,000. The $100,000 withdrawal now equals roughly 18% of what remains.

The recovery years that follow help, but the portfolio still finishes around $718,000 at the end of year five. Even though the average return matches Ramsey’s figure, the principal has fallen by more than a quarter.

If the sequence is reversed so the strong years come first, the same returns and withdrawals leave the account at about $1.06 million. That difference is known as sequence-of-returns risk: when shares are sold in a down market to fund spending, those shares do not participate in the rebound.

Another issue is hidden in the word “average.” A return path that averages 12% does not necessarily compound at 12% a year. When returns are volatile, the simple average can overstate the actual growth rate.

Withdrawal Size Can Make a Crash Manageable or Devastating

Investors cannot control market timing, but they can control how much they withdraw. That choice can change the entire outcome.

Using the same weak-then-strong return pattern, but withdrawing only $40,000 a year instead, the account would stand at about $655,200 after two down years. That decline still hurts, but each withdrawal takes a much smaller bite, leaving more shares to benefit from the recovery. By year five, the portfolio would have climbed to about $1.23 million, higher than the starting balance.

The returns are identical in both cases. At a 10% withdrawal rate, an early slump can permanently damage principal. At 4%, the same slump may be temporary. Ramsey’s 12% threshold sounds comfortable, but the math becomes much less forgiving once returns stop arriving smoothly.

Recent market swings show how quickly that can happen. The VIX, Wall Street’s volatility gauge, reached 21.15 before easing. Even after the decline, SPY remains up 9% for the year. Retirees who sold during the downturn would miss the rebound.

How to Test a Retirement Withdrawal Plan Before Trouble Hits

1. Calculate your true withdrawal rate. Divide the amount you plan to take from investments each year by your portfolio value. That figure is what really matters for risk.
2. Stress-test a rough sequence. In a spreadsheet, subtract your withdrawal first, then apply a 20% loss in the first year and a 10% loss in the second. Check how much of the remaining balance your withdrawal now consumes. If that share rises well above your starting rate, your plan relies on favorable timing.
3. Keep a cash reserve. Hold about one to two years of planned withdrawals in cash or short-term bonds. After a sharp market drop, you can use 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 early in a decline can preserve far more principal than bigger cuts made later.

Ramsey is right that spending less than your money makes is a smart habit. The real challenge is what happens during the next stretch of losses, because each withdrawal takes a larger share of the balance after a downturn. That is sequence-of-returns risk, and it can matter far more than the simple average return suggests.