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.
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.
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, the 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 Dave Ramsey will tell you to chronologically follow his baby steps. The fully funding emergency savings step comes before the paying off the house step. Thus, emergency funds are not to be used for this.