If
you have followed my blog for a while, you already know I’m not a fan of Dave
Ramsey, the alleged Christian financial advisor and radio personality. While he may advocate some solid, basic money
management principles, I think he goes off the rails with some of his retirement
advice (I’ll get to that momentarily) plus I think he is insulting, rude,
proud, and just generally not what I would expect a genuine Christian to be.
But
that doesn’t mean I won’t defend him when I think he’s right. And this week he came under attack from
another advisor who says that rather than saving money, as Ramsey advises,
people should concentrate on creating and maintaining an income flow. Savings?
That’s for chumps. Put your money
into real estate. (You get one guess
what field of investment this advisor specializes in.)
Whenever
someone asks whether real estate is a good investment, I always quote Will
Rogers on the topic: “Invest in land; I hear they’re not making any more.” But I do that in jest, because I’ve known
people who pinned their current and future income hopes on investing in rental
properties and then lost nearly everything when the real estate market went
bust. Ditto for people who were buying
fix-up properties to flip them for a profit.
Dave Ramsey himself fell victim to a real estate crash and went
bankrupt. It’s what launched him on his
career advising others on how to avoid his mistakes. So now he advises people to have at least
three months’ income saved for an emergency, eliminate debt, save aggressively,
and invest in stock index funds.
Not
this most recent real estate-oriented critic of his. He dismisses the concerns about sudden turns
in the real estate market and just says not to get over-leveraged (owe too much
money on the properties you’ve bought).
Your savings will lose value, but an income stream—if properly
structured—will last as long as you need it.
Forgive
me for being a skeptic. I’m sure some
folks have managed to make money in real estate. But even pros can get it wrong. Can you think of someone famous who has lost
money in real estate? Hmmm.
One
recent criticism of Dave Ramsey does have merit, however. Against
all evidence to the contrary, he still contends that an annual withdrawal rate
of 8% from one’s investments during retirement is sustainable. No reasonable financial model supports
this. Running thousands of scenarios in
what are called Monte Carlo simulations (a mathematical technique that predicts
possible outcomes of an uncertain event) of the stock market, an 8% withdrawal
rate did not work. The usual 4%
recommendation** was even found to fall short sometimes (i.e. the investor ran
out of money before he died). Some
financial advisors had started recommending a 3% withdrawal rate but most have
reverted to the 4% rule.
It
can be hard to sort through all the conflicting advice from the talking
heads. But you can always pick and
choose from their advice. No one advisor
is likely to be right 100% of the time.
And you can mix up your own approach.
Invest in the stock market and maybe even put some money in a real
estate investment trust (REIT) if you want to venture into real estate without
being a landlord. Just don’t stop
saving.
Until
next time,
Roger
**The
rule works like this: In your first year of retirement, withdraw 4% of your
balance for your living expenses. In the
second year, withdraw that same amount of money PLUS an amount to account for
inflation. So if your starting balance
was $100,000 then you would withdraw $4000 the first year. If inflation the second year is 3%, then that
year withdraw $4120, etc.
“Be
sensible and store up precious treasures—don’t waste them like a fool.” Proverbs 21:20 CEV
