"A highly controversial strategy, the 8% rule can be summed up as Ramsey recommending that retirees allocate 100% of their assets to equities. From there, these soon-to-be-retirees or retirees would then withdraw 8% per year of the portfolio's starting value, with each year's withdrawal adjusted based on inflation. Dave's advice is based on the idea that the market should see an average annual return of around 12%, which is great news if you are 100% invested."
"Let's say that in your first year of retirement, you have a portfolio that's 100% invested in equities with of principal of $500,000. If you pull out money based on the 8% rule, you would start with $40,000. Now, if you factor in 3% inflation, you are moving to pull $41,200 in year two, $42,436 in year three, etc., with the hope that you are earning more than you are spending."
The 8% rule calls for allocating 100% of retirement assets to equities and withdrawing 8% of the portfolio's starting value each year, with inflation adjustments. The strategy assumes average annual market returns near 12%, which would support full-equity exposure sustaining rising withdrawals. The approach is high-risk because it depends on consistent double-digit returns and offers little diversification into fixed-income or safer assets. A $500,000 all-equity portfolio would yield a $40,000 first-year withdrawal, increasing with inflation in subsequent years. Criticism focuses on volatility, sequence-of-returns risk, and unrealistic return expectations.
Read at 24/7 Wall St.
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