Why Dave Ramsey’s 12% Return Isn’t Reality

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If you are a Ramseyhead you might take what Dave Ramsey says as gospel, and fail to question the financial guru's opinions. I'll be the first one to admit, I'm not a fan of Dave's work. Getting out of debt, for the most part, is common sense — spend less than you earn and pay down what you owe. Common sense, unfortunately, isn't all too common today.

Many state Dave does a lot of good by getting individuals motivated to get out of debt. I guess I'll grant him that.

With so many Americans in debt, his target is “joe debt sixpack”.

The sad fact-of-the-matter is most Americans cannot balance a checkbook. They lack financial education to make money work for them and are led to believe that consumerism (buying expensive toys) is what makes you rich.

In the church of David his approach for all financial advice is done via an emotional appeal. For example, his Debt Snowball isn't the most efficient way to get out of debt, but it will make you feel good.

To Dave all debt is the work of the devil, and of course, recommends paying off your house early. Nevermind in many cases that's a bad idea financially speaking, especially in the current interest rate environment.

Then again Dave acts like a stern parent, and for the most part talks down in a preachy fashion to his listeners. As if he's implying his listeners are intellectually challenged. Maybe they are, but seems very off-putting especially when the advice is so basic.

If you read any other personal finance blog, you'll see many swear by Dave's programs and his books almost to the point where he has a “cult-like” following. I guess if you are under a mountain of debt at least he'll help you somewhat. Then again most personal finance blogs are about getting out of debt and not investing.

While Dave's focus of getting out of consumer debt is the right step, the issue becomes what to do next after you are are debt free? Investing is the only path to financial freedom, and this is where Dave shows his inexperience.

Most of his investing advice is either just OK, or outright wrong, and can lead to some big false assumptions when financial planning.

Take for example the 12% return story Dave's been sticking to, even with many financial professionals taking issue with this claim.

In his latest rant, Ramsey is still giving the same sermon about getting a 12% return in the stock market. For more information, you can check out Dave's website or watch the heated video below.

“You can discuss real rate of return, post-inflation [return]. You can discuss all of these freakin mathematical theories some of you financial nerds just sit around and crunch your numbers and you do nothing to help people. And what do we do? We get people to actually invest.”

He forgets to add — he does this by giving out a false rate of return that no one else in the investment community can replicate. Dave then proceeds to lay it on really heavy.

“Are they going to get 12? NO! They might get 14. Are they going to get 14? NO! They might get 18.”

He does state his returns are not on a compounded basis (CAGR), but average annual return. Most individuals and I assume especially Dave's audience, have no idea the difference. Investors grow their money on a compounded basis, and not by average annual return. Hence why CAGR is what matters when performing financial planning.

Dave's rant, like most of his, seems childish at best. Never have I seen a rant with more ad-hominem and straw men attacks.

Even so, let's keep the argument about the 12% average annual return. What is this 70-year-old mutual fund Dave speaks of? The only one I'm aware is Vanguard's Wellington Fund which has averaged 8.33% since inception. That's a whole 367 basis points (or 3.67%) lower than the return he suggests.

Even so, CFA Wade Pfau has discussed the eight percent return is a myth if you include all factors that every investor has to deal with.

In reality, you should expect a 2% compounded inflation-adjusted return.

This is far lower than the 12% mythical return Dave Ramsey suggests.

As I've stated before, Ramsey is correct the average American does not save enough for retirement. So I will give him some credit for that. The average rate of savings is around 4%, and has been decreasing since the 1970's. Most financial experts state we should be saving at least 15% of our annual salary for retirement. I personally recommend saving 20% for retirement.

One of the hidden issues when investing is fund expenses. Dave just so happens to not discuss this point. Not sure if this is out of ignorance, or to better sell his story and the investments he recommends. Ironically Dave's own ELPs put investors into high fee mutual funds — putting a real damper on compounding returns. Which some estimates claim can eat as much of 30% of your investments over the entire saving term for retirement.

Ramey's numbers are not only incorrect about investment returns, but also winding down your investments when retired. Dave suggests you should be able to spend 8% of your portfolio a year in retirement. From recent studies, even the original 4% gold-standard might be too high.

Combining both inaccuracies from Dave is very dangerous. If you use them to estimate the amount needed to retire, you will severely underfund your retirement. I didn't even get into his recommended 100% stock allocation and the risks associated with it.

Listen to Dave's investing advice at your own peril. Want to learn how to get into the stock market? click here.

Larry Ludwig

Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the ’90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He’s had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.

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  1. ”In reality, you should expect a 2% compounded inflation-adjusted return.”

    I must be missing something and I’m open to insight or correction. I’m new to investing but from what this is telling me, it seems like if I managed to go above and beyond and invest $100,000 by 21, by 75 I’ll have $291,346 worth of money with today’s buying power. Using the safe ”3% rule” of withdrawal, that would allow me to spend $8,740 a year, little over half of minimum wage.

    Even if instead of putting in a big investment as soon as possible and coasting, I invested $5000 every year until 75, I would have $483,536 to pull $14,506 a year out of, still under minimum wage.

    Seems incredibly bleak.

    1. Its only bleak if you stop investing at 21 and you are correct $5,000/yr is not enough You should target at least 25% of your take home pay. If you were able to save $100,000 by 21 you ought to be able to save another $300,000 by 30(you can do this with $17,000-$20,0000/yr which is tight but achievable on a $80,000 income). Now you have $291,0000 + $700,000. Throw in another $450,000 by 40. Now at age 55 you have something like $2,000,000. Now you are living on $60,000/yr + social security. Keep in mind this is all today’s buying power. If you are young it’ll will be some incomprehensible number($163,000) by the time you are 55

      1. Thank you for the response. I actually make 40k/y and was able to save that first 100k by living with my parents with no bills while saving everything. If I weren’t so lucky and had to move out at 18 and invested 25% every year until 65 with 2% growth, that would be 776,465$ to pull 23,294$ a year out of, plus social security if it’s still around. I see now how it’s possible to still make it if you’re a great saver your whole life, even with a normal job, but it’s still difficult to try and convince my normal-job-having peers that living ultra cheep for 45 years to unlock a bare sustenance retirement for the last years of their life is something worth doing. I genuinely don’t know what the answer is anymore for the average person pondering their future, except for ”live with your parents until you’re 30” or ”make more money lol”.

  2. There are plenty of managed funds that have averages above 12% with track records of 40, 50, 60, 70, even over 80 years – the first mutual fund was created in 1924. The fund Dave speaks of with 12.2 average return does exist, it is not a Vanguard Fund and has a current history greater then 80 years with a return above 12%!

    Due to my professional position and naming the fund could be deemed as advice, I am not able to name any funds and must remind investors that past performance is NOT an indication of Future performance, nor my comments here are NOT a recommendation or should NOT be construed as investment advice.

    I agree with Dave – just get started, invest monthly, increase your contributions regularly!

  3. You may want to check out the American Mutual Fund (AMRFX) inception was February 1950; the annual return has been 11.55% (prospectus page 6); hence Dave’s 12% return. There are other mutual funds in the 30, 40, 50 year range since inception doing better than 12% average annual returns.

    1. Agree that there are many funds. And even index funds that do 10% ~8% inflation adjusted) with virtually no fees. 5cents to buy and nothing to eat your growth. No management fees. Who cares that he has number slightly off? If average American would invest just in index fund they would me multimillionaire a at retirement regardless.
      I am not preaching Ramsay’s approach as The One. I disagree with his strategy to good sent especially when mortgage rate in Canada is now as low as 1.3% interest. With inflation you make more money by borrowing it. But he damn gets people on investment path and I highly respect that.

  4. Dave gets his advice information from his days with Primerica – you could say that he is the most successful representative to come out of the organization.. If you do not know who/what Primerica is/are, or their procedures, look it up.. I will give you a hint – Some of the main things they always taught was a 12% return on investments, rule 72, your money will double in 6 years with compounding – Term life insurance over whole life insurance..

    They also had a variation of the Debt Snowball. Dave added to it over the years, including naming it. Primerica didn’t have a name for it – Primerica’s version was just to pay debt off from the least amount owed to the highest amount owed. It does make sense to do such. But, everyone is different in how they do things.

    Primerica owns Travelers Group (which included Solomon Smith Barney), and were once owned by Citigroup. They are a multi-billion dollar company, and are listed in the New York Stock Exchange.

    1. The last 18 months do not count.! When you factor in a 1.5 to 1.7 management fee, and then the taxes on the back end, you will be lucky to net 5% for the last 18 years., since 2000. You have to look at the total market ACTUAL RETURNS, not the average return. You do not get the average return, even though the Wall Street folks only mention Average. They never mention Actual net Return; Why, because it is always lower. Add to this the next market crash; which happens about every 8 to 10 years if you do your homework,. The only people getting rich on 401k,IRA, 403b, or 457 plans are your advisor and Uncle Sam.

      1. Dave seems pretty reasonable. I’ve watched a few of his videos on you tube and they give very basic advice to the people who need it.

        Maybe I’m just lucky but 12% doesnt seem too absurd. My portfolio has averaged 70% returns since I began investing in stock. I lost about 30% of my portfolio when I first began because I had no idea what I was doing. I have a tolerance for pain so continued through it and learned a few essentails. START WITH VERY SMALL TRADES AND DO PRACTICE RUNS TO LEARN THE CYCLES AND TRENDS OF A PARTICULAR COMPANY. Find companies with solid financials that you, your friends, and family find useful. Then force yourself to do the opposite of what the big names tell you and then use basic technical analysis for buy and sell points, you will be leaps and bounds above the S&P500.

  5. Great article. If your town is broke and your taxes are going up, you can be pretty sure it’s due to pension liability. Those pensions were promised using numbers similar to 12% expected stock market returns and 8% spend in retirement. Hopefully, that kind of advice won’t bankrupt people the way it threatens to bankrupt municipalities. Almost everything Dave says is mathematically wrong, and anytime I’ve ever seen someone point out a different view, he gets nasty about it. Yes, he needs to get people motivated, to buy his books and attend his seminars. If people liked Trump U, they’re going to love Dave U. Caveat emptor.

  6. It’s too bad you can’t critique something without making personal attacks on the intelligence and character of another human… Dave has probably done more to help people than you will ever even imagine. I guess that’s probably more the result of immaturity 🙂

    1. Hmm I did attack his points. Any “personal attacks” were meant as comic relief in the story. If anything, from all things I’ve read about him, he’s got a very thin skin.

      1. Regardless of how thin Dave’s skin is, he’s done more for people than you ever will.

  7. I fully respect your argument against the 12% return, and as I learn more about investing, I actually agree. But I don’t think Dave’s stance on the average rate of return negates what he’s done for a lot of people drowning in debt (I’d say much more than the “somewhat” you mention above). I’ll admit that many of Dave’s principles are basic (as you stated, getting out of debt is simple…in theory), but there is a huge market of people that have never heard the basics of managing money. When dealing with this group, you’re up against deeply rooted mindsets that view living above your means as a normal part of life. Sometimes you have to pull at them emotionally to get them to understand the impact of their actions, and to motivate them to take a different set of actions. And it’s not a matter of them being intellectually challenged, it’s a matter of changing behaviors that have been passed down from generation to generation. Some of the “more efficient” ways of getting out of debt, like paying higher-interest loans first (which I assume you’re referring to above), are worthless if you can’t stick to the simple habits of paying off any debt (like consistently putting more money toward your debt). This is why you focus this group on the actions that will make them feel good, keep them motivated, and keep them consistent. I am a fan of Dave although I’ve never read any of his books or taken a class, so I’m not sure if I qualify as part of the “cult-like” following (which is a little dramatic), but I do appreciate the work he’s done…just as I appreciate money experts of all walks of life that leave a positive impact. You guys are simply serving different markets…like Mark said, you are both needed. Appreciate this article!

  8. I see Dave’s value in that he’s able to reach and motivate a lot people who are probably better off because they’re actually paying attention to their finances, but a lot of his advice and claims make me wary.

  9. Let me start by saying I like Dave Ramsey and the Investor Junkie. Personalities like Dave Ramsey have a tendency to be dramatic( or as you might say it emotion based). Well, emotion moves people. People with serious debt problems need to be prodded and pushed into a more responsible situation. I think on balance he helps more people than he hurts. I might add, so do you. As long as folks get financial advice from sound, if very divergent, people I think the public will be well served.
    As for the 12 percent return or the 2 percent, I think you’re much closer to the part. Besides 12 percent nowadays sounds more like a fantasy than prudent advice. In any event, let’s keep the dialogue going.

  10. Excellent post. Two points. First, if a Fund goes from $100 to $50 the return is -50%. If it then goes back to $100 the return is +100%. The average return is +25%. I guess Dave Ramsey would love this Fund.
    Secondly, I’m curious about when the video was made. We know how the assumption of expecting housing prices in a neighborhood to rise based on past performance worked out.
    I still am a partial fan of Ramsey’s. He goes into churches and other places and enables people to get themselves out of debt. The reason those of his ilk exist reflects the lack of financial literacy in the country. His justification for misleading people on the investment front is that apparently by exaggerating he gets them to invest. By the force of his rant you can tell he knows he is misleading people.

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