Dave Ramsey. I Love Your 7 Steps, but Not Your Social Security Advice.

America's top financial healer is generally on target, but not on Social Security.

The Market Speaks

When it comes to motivating us to change our financial behavior, Dave Ramsey is simply the best. That’s not my opinion. That’s the market’s. Ramsey is a New York Times best selling author with 20 million weekly radio listeners.

The gist of Ramsey’s message is self-help.

I did it. You can too. It’s simple. It’s tough. It will hurt. But there’s a massive dollar payoff. That payoff is not just money. There’s also financial peace of mind and the ability to give to others.

His action plan?

Work yourself to the bone, Spend nothing, Save everything, Pay off your debts and then invest every penny in a sure bet — the stock market.

Ramsey exaggerates to motivate. Yet, he’s not doctrinaire. He acknowledges that there are exceptions to his rules — spending for emergencies, borrowing to buy a home, etc.

Selling Abstinence

Selling “less is more” is not easy. But, as Dave (I’m taking a liberty here as we’ve never met.) puts it, “… live like no one else so later (you) can live like no one else.” This translates into sacrifice now and live like a king in retirement compared to others with similar wages.

Dave is the consummate salesman. His books, including his 2024 best seller, The Total Money Makeove, Updated and Expanded, hook his readers with stories. The foundational story is his own — great early success followed by over spending, bankruptcy, and shame, followed by financial enlightenment, summarized in Dave’s 7-Step Path to Financial Peace.

Ramsey’s 7 Steps to Financial Peace

• Save $1,000 for Your Starter Emergency Fund.

• Pay Off All Debt (Except the House) Using the Debt Snowball.

• Save 3–6 Months of Expenses in a Fully Funded Emergency Fund.

• Invest 15% of Your Household Income in Retirement.

• Save for Your Children's College Fund.

• Pay Off Your Home Early.

• Build Wealth and Give.

AA has 12 steps to recovery. Ramsey have 7. His message is, thus, Getting rich is easier than getting sober. Over 10 percent of Americans are readily identifiable alcoholics. Financial disease is much harder to spot short of a train wreck. Yet, when it comes to money, most of us are deer caught in the headlights. So, if you sound like this, you probably need help.

“Tomorrow will take care of itself.”

“I’m too afraid to look at my finances.”

“I contribute to Social Security and my employer’s plan. That’s enough.”

“I’ve had it. I deserve to retire. I’m out of here.”

“No way I’ll live past 75. Let’s book that cruise.”

“My portfolio? Haven’t looked at it for years. Too scared.”

“My money is with cousin Sarah. I trust her. Ask her how I’m doing.”

“Life insurance? I’m strong as an ox.”

These everyday symptoms of money madness are the bread and butter of behavioral finance. Economists developed this field after getting hit in the head by the evidence: When it comes to financial decisions, homo economicus is an entirely fictional character.

Several Nobel laureates received their prizes for “discovering” this fact and coming up with “nudges,” “defaults,” and other modest schemes to change behavior, none of which appear to be making much of a difference — probably much less than Dave is making.

Ramsey Recognized Behavioral Problems Early On

Dave recognized financial paralysis and self delusion years before behavioral economists put 2 and 2 together. His self-help answer is equal parts encouragement and tough love.

Yes, you can. I was there too. Want to be rich? It’s easy. Stop whining and start acting. I’ll hold your hand. We’ll start with baby steps.

Ramsey’s Rules have, no doubt, financially unblocked hoards of his followers. But I see something requiring computation in his 7 steps — something I implemented (before I’d even heard Dave’s name) in my company’s MaxiFi Planner software, a special means of jointly determining how much to spend and how to invest. It’s called Upside Investing.

Implementing Ramsey’s Rules Via Upside Investing

With Upside Investing, you tell MaxiFi how much of your assets you’re investing safely — in TIPS (or other safe investments) — and how much you are investing in the S&P, i.e., in stocks. The stocks can be thought of as sitting in a pot — the stock pot. You also tell the program how much you’ll be adding to your stock pot each year through retirement.

Rule 1 is you spend only out of safe assets. I.e., you treat your stocks as lost until they’re found. Think of the pot as having a magic lid. Every time you look inside, you see nothing until you reach the start date for selling your stocks. Before then you invest everything not placed in the pot in TIPS, spending out of these safe assets and your other resources on a sustainable basis. This MaxiFi-calculated sustainable real spending level constitutes your lowest living standard floor.

Rule 2 is increase your sustainable spending — your living standard floor — whenever you start withdrawing your stocks and converting the proceeds into TIPS. Recall, you ignore you never spend out of stocks until they have been made safe. Say you withdraw from your stock pot between ages 65 and 75, selling 1/10th of your stocks at 65, 1/9th at 66, 1/8th at 67, etc. During these withdraw years, you raise your living standard floor each year based on that' year’s stock-sale proceeds. Since all stock-sale proceeds are immediately invested in TIPS, MaxiFi raises your sustainable living standard floor — hence the name Upside Investing. But the dollar value of what you withdraw each year depends on the market’s performance. Hence, MaxiFi runs Living Standard Monte Carlo simulations to show you the range of potential upsides.

Upside’s Connection to the 7 Steps

Dave’s 7 steps also have you put a portion of your savings into a stock pot and spend, through time, at the same low to moderate real level, year after year, until you begin selling your stock. Taking nothing out of the pot earlier than scheduled gives your stocks the best chance to grow — potentially to a very large value if you put enough in the pot as soon as possible.

Equally important, you can’t start spending more if the value of the stocks in your pot rise (you look inside and can see what’s there). You need to stick to your spending plan that’s sustainable. Yes, the pot’s worth more today. But it could be worth far less tomorrow. So, just ignore it and base your spending on the sure real returns from investing in TIPS.

Btw, if you aren’t familiar with buying individual TIPS and forming a TIPS ladder to secure your living standard through time, please watch this podcast with Kevin Esler, who developed TIPSLADDER.com.

To repeat, Upside Investing uses Living Standard Monte Carlo simulations to shows the potential of Dave’s Step 7 — Build Wealth and Give. It also shows the precise trade off between your living standard floor and its upside. Putting more in the pot means sacrificing — having a lower living standard floor prior to retirement — for the chance of a higher future upside. Putting less in the pot means a higher floor prior to retirement, but lower potential upside.

Moreover, since you’re never spending out of risky investments (assets that aren’t for sure), you’ll have financial peace of mind. You know your living standard floor will never fall. In short, Upside Investing implements Dave’s 7 steps, but lets you see the degrees to which it will pay off and the associated probabilities. Stated differently, Upside Investing lets you figure out, to the dollar, what the 7 Rules don’t clarify — the amount of your pre-retirement living standard you feel comfortable sacrificing when young to produce, with a decent probability, a higher retirement living standard.

This Is Not Wall Street’s Bucketing Strategy

Many advisors segment your investments into three buckets — cash or the equivalent to cover short-term needs, high-quality medium-term bonds and dividend-paying stock to cover your medium-term needs, and stock, which are assumed, without basis (see below), to be safe in the long run to cover your long-term needs. This strategy doesn’t have you spend only out of safe assets. It has you spend out of risky assets while pretending they are safe. It’s worse than looking in the stock pot. It’s not looking and assuming it will be worth what you invest compounded at a for sure super high rate of return. This is a prescription for financial disaster. Bonds can be killed by inflation, which we just experienced in spades. And, yes, stocks can be expected to rise by 7 percent annually, but with huge variability (standard deviation) — roughly 20 percentage points.

Dave, Let’s Not Exaggerate the Stock Market’s Return

Page three of Total Money Makeover has this header: The Book Is NOT Going to Mislead You About Investment Returns. But this is precisely what Dave does in the very next sentence!

That sentence claims that the S&P has, since 1925, yielded 12 percent, on average. He also implies that the S&P has performed essentially as well over any long-term holding period and will continue to do so. In short, investing in the market is a no brainer, money machine.

Twelve percent is an amazingly high return. Invest $1 for 40 years at 12 percent and you’ll end up with $93. Hence, even small amounts of saving, say saving $2500 a year for five years starting at, say, 35, will leave you a millionaire at 75!

Woo hoo!

But Ramsey’s referencing the nominal, not the real (inflation-adjusted) rate of return. The real return on the S&P since 1925 is far lower — 7.3 percent. The reason is inflation. A dollar today has 18 times less purchasing power than a dollar in 1925.

Exaggerating the (geometric) average real return on stocks by 71 percent on page 3 is — well, you decide. Dave knows better. But, again, this is part of his method: Exaggerate to motivate. Parents tell their kids white lies to get them to eat their veggies. Dave’s clearly doing this with his readers.

Dave also suggests that stocks are safer the longer you hold them. His evidence? Stocks have done well over the long term, e.g., 30 years, regardless of when you invested. The problem here is that there are only three independent 30-year holding periods in the post-1925 S&P stock market data series. All the other 30-year holding periods use overlapping data.

Three observations is not much data on which to make a case. Japan’s NIKKEI stock index provides a fourth observation. It peaked in the late 1980s and then crashed. Thirty years later it was still below its peak. It’s just recently regained its 1989 level!

In short, there is no guarantee that the stock pot won’t hold less value when you finally look inside compared to what you put in. On the other hand, since you aren’t spending from or based on the pot until you start emptying it, you have produced the best chance for the assets inside to grow.

Our Upside Investing Standard of Living Monte Carlo simulations show that even small shares of assets placed in the pot, e.g., 20 percent, can generate very high upsides to your future living standard. But can is the operative word. Nothing’s guaranteed. Risk is risk. And even eliminating sequence of return risk — sticking your hand into the pot (the cookie jar) to go on the cruise only to have the market soar the day you board — doesn’t guarantee the pot will be overflowing when you lift the lid.

The risk of the stock market can be read off the difference between 7% and 2%. The 7% is, again, the long-run average real return on the S&P. The 2% is today’s real yield on long-term safe assets namely 30-year TIPS. Economists call the 5% difference the risk premium. Stated differently, you need to forego 71% of the average real return on the S&P to eliminate its risk. Needless to say, 2% is miles lower than 12%.

But that 7% is damn big. So, we all want to spend time in the S&P casino. There’s no other casino in the world that provides even 50-50 odds, whereas the S&P casino has 57-43 positive odds. Upside Investing, like Dave’s Rules, keeps you from spending your winnings until you’ve left the casino. Why? Because that last game of roulette may wipe out years of gains.

Dave’s Awful Social Security Advice

As a nerdy, but feisty academic — the kind Dave likes to trash, I originally came to bury Dave, not to praise him. But then I did my homework, read some of his books, and turned into a major fan. I have encountered so many people, including most economists, who fail, for years, to do any financial planning. Hence, anything that motivates people to plan is music to my ears.

This said, I’m not a fan of Dave’s recent Social Security advice, namely take your benefits early and put them in the S&P.

Certainly, no one should retire to take their benefits and put them in the S&P. But given Social Security’s Earning Test, you can’t collect all your benefits unless you earn less than $22,320 (The 2024 exempt amount). Hence, Dave’s counsel here is crazy squared. (Dave, if you’re reading this, come on my larrykotlikoff.subtack.com podcast and you can argue back. Contact me at kotlikoff@gmail.com.)

But suppose you have already retired and are age 62. If you wait till 70 to start your retirement benefit, it will be 76 percent higher, adjusted for inflation, than if you take it immediately. Yes, benefits could be cut to keep the System solvent — by up to 21 percent starting in 2034 according to the 2024 Social Security Trustees Report. But, given the politics — the fact that the elderly have nothing to do on election day except vote — the chances of this happening are beyond remote. Moreover, it behoves the vast majority of retirees to wait until 70 to collect even if benefits are cut. You can see this by running my company’s $49 Maximize My Social Security software tool and specifying a benefit cut under Settings and Assumptions.

Why Dave Has Social Security So Wrong

For most retirees, waiting to collect is like buying a one once bar of gold at Sam’s Take the Gold and Go, for $2,600 (the prevailing price) and selling it next door at Sheila’s Gold Is a Man’s Best Friend for $3,900. The reason for this arbitrage opportunity is that the government’s actuarial 76 percent adjustment is far greater than actuarially fair. Why? The adjustments were set years ago when survival rates were far lower.

Moreover, actuarial calculations don’t apply for individual retirees because we can’t count on dying on an actuarial basis, i.e., at our life expectancy. Social Security has enormous value not picked up by actuarial calculations. It provides longevity insurance. Your benefit keeps coming as long as you keep going. Consequently, the value of the gold bar at Sheila’s is likely closer to $5,000.

Also, The Street says “Ramsey explains that if you were to invest $700 a month from the time you are 62 to the time you are 77, that would be 15 years of investments that could potentially result in another $318,000 or so.”

This is Dave using that bogus 12 percent rate of return again. Come on Dave. You need to calculate using 7% to adjust for inflation and 2% or less to adjust for risk because Social Security is surely less risky than TIPS. By this I mean the chance of Congress defaulting on (cutting) Social Security benefits seems far lower than the chance it will default on official debt. When you use 2% as the apples-to-apples return you can earn on early Social Security benefits, the case is clear. That return is miles below the 7% to 8% increase in real Social Security benefits that you receive by waiting an extra year to start collecting — for each year between ages 62 and 70.

Bottom Line

If you’re one of Dave Ramsey’s 20 million and counting flock, click the next button. It answers the immediate question everyone surely has after reading Dave’s books.

“I should pinch pennies now. But by how exactly much? To figure this out, I need to understand the potential payoff down the road — not from a charismatic, whose great with words, but not with numbers, but from a nerdy academic who’s great with numbers and so-so with words.”

PS, I’m actually a little better than so-so with words. My 2015 (co-authored with PBS NewsHour’s incredible Paul Solman and the fantastic personal finance journalist, Phil Moeller) Get What’s Yours — the Secrets to Maxing Out Your Social Security was the #1 best seller on Amazon for over a week and in the top ten for roughly nine months. It’s fully up to date and will entertain and blow your mind on Social Security. How can a book about Social Security rules become a run away national best seller? The book is a very fun, sardonic read.

Also, my 2022 book, Money Magic — the Secrets to More Money, Less Risk, and a Better Life, was voted the best personal finance book of 2022. It beat Dave’s 2022 book, The Momentum Theorem!

And then there’s this 2023 book — Social Security Horror Stories, Protect Yourself from the System and Avoid Clawbacks, which I co-authored with Terry Savage. Terry, like Phil and my other fantastic co-author, Scott Burns, is one of our nation’s handful of truly extraordinary personal finance journalists. (To see why you should buy Social Security Horror Stories, please watch Terry and me discuss the System’s horrific clawbacks with Anderson Cooper on 60 Minutes.)

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