Seriously, Dave?! You never cease to amaze me.
On August 4th while listening to “The Dave Ramsey Show,” I wondered how the host, in about two minutes time, could unknowingly cause so much damage.
Like a Great Dane on white carpet, you can yell and scream at the gentle beast, but the animal is not likely to understand your contempt.
This time, the caller was an almost 60-year-old married man with questions about whether he should cash out his IRA to pay off his mortgage. Ramsey — the unlicensed, debt-biased, non-math-using, self-proclaimed crusader of the American middle class — answered the man’s question, but he was clearly ill-equipped to do so as his advice may result in a nearly $11,000 loss for the caller.
This isn’t an opinion, its math.
Related: What if Dave Ramsey were held to a fiduciary standard?
Here are the details. The couple in question has the following assets:
- IRA: $165,000
- Annuity through work: $30,000
- Emergency fund: $10,000
- Mortgage balance: $72,000
Ramsey almost always advises his callers to pay off their mortgages. His reasoning? That way, Ramsey said during this particular call, “We know you’re going into retirement with a paid-for house.”
Ramsey surmised that the caller would still have about $100,000 left in addition to the savings he and his wife can accumulate in the next 5-10 years. “Yeah, you ought to be able to do very, very well during that time,” he said.
Kudos to Dave for one thing. He did ask the caller his age, total assets, and total debts. But he forgot to ask about household income, the interest rate on the mortgage, and the monthly payment. Seriously, Dave?! Did you really tell someone to pay off their mortgage without knowing the interest rate, their monthly payment, or their income?
The problem is, in one swift swoop, this couple, just years from retirement, will withdraw nearly half of their savings and pay about $28,000 in taxes in the process.
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A more practical plan might involve doing the same thing, but over a few years. This approach would lower the taxable consequence to about $14,000, and although there would be mortgage interest, it would only be about $3,000. And there you have it: $28,000 minus $17,000 is an $11,000 blunder.
Want more? Of course you do!
With more detail, I can further prove the lunacy of Ramsey’s advice, and show you how the true cost to this caller will be much greater.
Due to Dave’s predictable failure to obtain critical data from his caller, I made a few assumptions:
- Household adjusted gross income is about $75,000
- Household taxable income is about $55,000
- Presumed state tax rate: 4 percent
- Mortgage principal and interest payment: $656 (That’s $75,000 with 12 years remaining at 4 percent interest.)
I made the mortgage payoff $75,000 rather than the $72,000, just in-case the caller owes more than he thought or needs to cover any lingering debts or miscellaneous costs.
Under Ramsey Law, we know the couple will pay off the mortgage. But will they use part of the emergency fund or strictly withdraw from the IRA? Well, he did caller ask whether he should use IRA funds, and Dave said, “Yes!”
Since Ramsey is hell bent on having people pay off their mortgage in full, without any thought or consideration given to taxation or consequence, the bulk of this withdrawal will be taxed at the 25-28 percent federal level. To get the $75,000 necessary to cover the mortgage, these Ramsonites will actually need to withdraw at least $103,118.
Ramsey fans often say to me, “Well that’s not what Dave meant!” But the fact is that smart financial advisors always come back to basic, baby steps, which are chronological. These include fully funding emergency savings before paying off the house. That way, emergency funds are not used to cover debts.
Under a practical plan, with withdrawals spread over several tax years, dollars are only taxed at 15 percent, ceteris paribus. The 13 percent of unnecessary tax is, in the words of Ramsey, “a stupid tax.” (I have to admit, his quirks and one-liners are entertaining.) But unfortunately, Ramsey advice may always lead people to pay such stupid taxes.
Related: 4 more Dave Ramsey myths, debunked
What’s more, under Dave’s plan, this caller’s IRA is whittled down to $61,882. If the couple invests the house payment ($656/ month), then, under the practical plan, their ending IRA balance will be $92,031 by the time the mortgage is paid in full. But, oops! This is at a 6 percent rate of return. Silly me, Dave famously tells listeners to expect a 12 percent average annual return. At 12 percent, they’ll have $104,765. In comparison, the practical plan balance, at 6 percent and 12 percent interest respectively, results in $109,632 and $131,247.
So in fact, Dave’s advice didn’t cost the couple $10,944 as I originally thought. The actual cost was between $17,601 and $26,482.
Dave Ramsey will tell you to ignore simple math like this. He believes in eliminating all debt, at any cost, because if you play with snakes you’ll get bit.
But unlike Dave Ramsey, trained financial planners work with people for years, not minutes. When you work with people for years, you see life’s ups and downs, like job loss or chronic illness. It’s simply not prudent to tell someone who is 60-years-old, with less than a decade of work remaining, to use up half of their life’s savings and make the assumption that they’ll be able to work and save long enough, and experience a return great enough, to replenish their assets.
Here’s one last question, just for fun: If this advice is just an average Ramsey blunder, then how much, over time, has he cost his listeners?
The answer is somewhere in the neighborhood of $4,118,400,000. How did I arrive at that number? Here’s how: 3 broadcast hours a day x 5 days a week x 52 weeks a year x 20 years with 20 percent of airtime dedicated to commercials.
Even Bernie Madoff got into hot water for inflicting less loss (at about $20 billion).
On August 4th, the only thing that Dave Ramsey got right was the couple would be left with about $100,000. But his obnoxiously stubborn viewpoint about debt blinds him from considering mathematically superior ways of accomplishing the same goal.
Ramsey does not hold an insurance license, a securities license or a tax license. As far as I can tell, the only thing he’s licensed to do is drive a car.
Also by this writer:
Debunked: Dave Ramsey’s cash value life insurance advice
Dave Ramsey: Negligent, incompetent or simply naive?
3 false assumptions Dave Ramsey makes about term life insurance
A closer look at Dave Ramsey’s crusade against credit
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Here’s how Dave Ramsey racked up billions in listener losses
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