Three Things Dave Ramsey Won't Tell You

Dave Ramsey has helped thousands of individuals and families regain control of their spending habits (and lives) with his simple-to-follow "envelope system" and "debt snowball" methods. I am one of them. I purchased his books, went to Financial Peace University, and implemented (with great success) his debt-free philosophy.

I met detractors along the way, however. Folks who would just casually drop a line about how Dave might say a lot of good things, but they disagreed with him about... (name your subject). It always struck me as odd when people criticized his methods. For the most part I discounted these statements as ignorant and / or risky. That is, until someone put it to me this way: "If you want to be debt-free, do what Dave Ramsey says. If you want to be wealthy, do what Dave Ramsey does."

What does that mean? I had to think about it. Dave didn't become wealthy through his qualified retirement plan. He became wealthy long before he could access that money without penalties. How did he do it? CASH FLOW. He wrote and sold books that brought cash flow. He taught seminars that brought cash flow. He started a syndicated radio program (and podcast) that brought cash flow. He created Financial Peace University that brought cash flow. He partnered with Zander Insurance and other ELPs ("Endorsed Local Providers") like real estate agents from whom he earned commissions for affiliation with his brand for yet another stream of cash flow.

Yet that's not what he tells his audience--instead he tells them to find a good growth stock mutual fund earning 12% and sacrifice 15% of their income to it their entire working lives. Then he tells them to hope that it achieves enough growth to draw from it without completely depleting it before they die. Bad year in the market? "Not to worry," he says, "It's on sale! Buy more!" Just what every mutual fund manager (who gets paid on "assets under management" and not on performance) loves to hear. As much as I appreciated all I had learned from Dave, that plan never sat well with me. Still, I tried, but it wasn't working. In fact, it can't work. I'll tell you three reasons why:

1. Average does not equal actual. Flip open any mutual fund comparison booklet and you'll see a list of funds offered and their average returns over various periods of time. We look at the average and naturally think that's how our portfolio will perform. How misleading! Losses have more of an effect on a portfolio than gains, especially when combined with distributions and taxation. Just think how difficult it was to raise your GPA after a lower grade. Want proof? The picture above shows how a hypothetical $1,000,000 portfolio would perform under an average return and the actual return, assuming a $100,000 annual withdraw in retirement. I've selected the thirty best consecutive years in S&P history: 1970-1999, representing an average rate of return of 14.73% (S&P 500 with dividends). The average portfolio performs incredibly well--reaching almost $18,000,000 over the thirty year time-frame! Unfortunately that's not reality. The actual returns, are much less exciting. The entire account is almost completely wiped out in just 17 years! That equates to a real average return of about 6.86%, not 14.73%. Said another way, the account would need an initial value of $2.9M (almost three times as large) to achieve the expected results.

2. Your taxes will be higher. It is almost guaranteed that you'll pay more in taxes later in life. Not only does the average income rise with age, but tax deductions typically decrease as we pay off our mortgages and our children leave the nest. Plus, the government is going to have to find a way to fund their ever-increasing amount of liabilities, so tax increases can be expected. In addition, the inflation tax (the most insidious of all taxes) is certain to steal a portion of all we've earned. The Fed's target inflation rate of 2%, for example, means that after ten years, a $1,000,000 portfolio would have only $800,000 worth of buying power. As if that weren't enough, qualified plans are designed so that we pay taxes on the "harvest" (the larger, mature portfolio) rather than the "seed" (the smaller contributions). Assuming your portfolio beats the odds and excels, even while management fees erode its wealth-building potential throughout your lifetime, you will pay a larger amount in taxes on the distributions than you would have on the initial contributions (excepting Roth plans). Conventional wisdom says that we should plan to spend less when we retire--how exciting is that? Planning to be in a lower tax bracket when you retire is planning to be poorer than you are now.

1. The wealthy don't use qualified plans... not to become wealthy anyway. Have you ever met a self-made millionaire who has his 401(k) to thank for it? Instead, like Dave, true wealth builders focus on cash flow. More precisely, they focus on creating repeatable systems of cash flow. Another term or phrase you may have heard for this idea is creating multiple passive income streams. Streams of water flow with currents, streams of money flow with currency. Whether it's a dry-cleaning business or a bank, motion is the key component to the success of any business. It's the motion of goods, services, and capital that creates wealth. On the contrary, Dave encourages us to do things with money that we would never do with the things money can buy! Would you purchase a car and not drive it for thirty years? What about buying a loaf of bread and waiting thirty years to eat it? That's essentially what we're doing with our money in qualified retirement plans. We stop the motion of our money, from our perspective anyway.

We haven't even begun to discuss how fraught with danger these qualified plans are due to government regulation, Federal Bank meddling, timing risk, speculative risk, systemic risk, etc.. Even though the 401(k) and other qualified retirement plans may fail dramatically, there are other options. We specialize in helping our clients take control of their financial destiny through the use of specially designed dividend-paying whole life insurance policies (and yes, we know what Dave says about those too). There are many reasons that the wealthiest families in America choose policies such as ours as a major component of their financial plan. Like them, we can help you achieve a more prosperous future and a more abundant life. Contact us today!

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Learn more at www.livingwealth.com.

The information presented here is solely for informational and educational purposes. Dan Watkins is not a registered financial adviser. He can be reached at: dan.watkins@livingwealth.com.