I hate Jenga®. To me, it’s a stupid, boring, building game with 54 blocks, most of which are inconsequential to the stability of the tower.
But this yawner of a game got me thinking.
In every Jenga® tower, there are a few blocks that are at the core of the tower’s structural integrity. Remove one of these blocks, and the tower becomes weaker. As each core block is removed, the tower becomes less stable until eventually it starts to sway with even the slightest nearby movement.
Finally, there’s a core piece. Removing it brings down the whole thing, and the victorious player gets to unleash an ear-blistering “Jenga®!”
To make this game, which is far from my favorite, a bit more interesting, I’ve invented Dave Ramsey Jenga. No, that doesn’t mean Jenga® played with “gazelle intensity,” to borrow a phrase from Dave. It means we’ll label a few core blocks with themes that mimic finance entertainer Dave Ramsey’s philosophy, then see how stable a financial plan is once each piece is removed.
Here are the blocks we’ll use:
- Gift Taxes
- Inherited IRAs
- Calculated Rate of Return
We’ll remove each block with an example of the bad advice given by Dave Ramsey. For anyone new to this column, remember this hallmark:
Bad math leads to bad advice, and bad advice hurts people.
Dave Ramsey often fails to collect the types of details that registered advisors use to make informed client recommendations. (Photo: AP Images)
First Jenga® Block: Gift Taxes
Danita from Flint, Michigan recently asked Dave Ramsey how to set up a gift for her nephews. Here are some of the details:
- She inherited money from her parents’ estate.
- Her father’s wishes were for her to give each nephew $100,000.
- She has two nephews.
Dave’s reply: “If an individual gives another individual a gift of over $14,000, the amount over that is taxed as a gift tax and probably as high as 55 percent.”
Upon further consideration:
The top tax gift tax bracket is 40 percent, not 55 percent. Furthermore, this is on amounts in excess of $1,000,000 past the gift tax exclusion. The last time the top rate was 55 percent was about 15 years ago, when the estate tax limit was a fraction of what it is today.
Although he correctly advised Danita to use the unified tax credit, he went on to prove he’s not qualified to give this advice. (Remember, he’s also not licensed.) Dave told Danita to seek out an attorney to avoid the tax. This isn’t a legality issue, it’s a tax issue. Danita should see an accountant or CPA since this requires a special tax return.
Dave also told Danita that she could gift the annual limit of $14,000 to each nephew and his spouse. While this is correct, it opens up a better question. Is Danita married? If so, both she and her husband could maximize the annual gift to each nephew and each nephew’s spouse. In other words, they could gift $56,000 now and $44,000 in January… and bingo-bango, they’d be done.
This approach would be far better than the $28,000 for nearly four years that Dave Ramsey recommended. Either Dave didn’t think of this or he didn’t know they could do this. That means he was either incompetent or negligence. You decide.
Second Jenga® Block: Debt
Chris from Flint, Michigan recently asked Dave: How to start investing?
Here are the details:
- Chris is fully disabled.
- He received $750 per month.
- He is 58 years old.
- He has $25,000 in past-due debts from federally-insured student loans, child support payments, and consumer purchases.
Dave Ramsey correctly told Chris that federally-insured student loans are forgivable for the disabled. But before you start wondering why we’re removing this block, let me say this: Sometimes it’s not about what you know, it’s what you don’t know.
I once had a colleague whose partner, like Chris, was fully disabled and receiving benefits. This person had fallen behind on car and credit card payments. After a few years of no payments and continued full disability, the lenders forgave the balances since they generally can’t garnish disability payments.
Dave Ramsey and I agree that people should pay their debts if they can afford to do so. In his syndicated monthly print column, “Dave Says,” Ramsey once told a reader named Bill that “when it comes to paying off bills or debt, you should always pay what’s owed if you have the money. There’s a moral, as well as legal, responsibility involved.”
However, on only $750 per month of income, Chris is not equipped to pay all of his bills and debts. Dave Ramsey agreed: “Well, you have absolutely no debt of any kind? You wouldn’t be making it on $750 if you did, I suppose.”
What hasn’t been discussed is that past due child support, and taxes can cause disability payments to be levied. Chris should not consider paying any past due liabilities except those that can be collected, which are his child-support and taxes. There’s a tool to help people out in this situation. It’s called bankruptcy.
Good people sometimes make bad decisions. Sometimes the compilation of bad decisions births an obstacle insurmountable in size. Dave Ramsey filed for bankruptcy. He was healthy, young and capable of making a living, all of which Chris is NOT. With this in mind, Dave failed Chris.
Dave Ramsey tends to make sweeting advice when it comes to annuities. (Photo: iStock)
Third Jenga® Block: Inherited IRAs
Larry from Texas recently asked: Should I roll a Traditional inherited IRA over to a Roth IRA?
Here are the details:
- He’s getting two inheritances: One he’ll use to pay off the house, the other he’ll invest.
- He’s married
- He’s his late 50s.
Here’s what Dave said: “If you roll it to a traditional inherited IRA, you have no taxes on it now. But there is a requirement that you pull a certain amount out of each per year. It’s going to be a pretty aggressive requirement, given your age.”
This may not sound egregious but it’s 100 percent opposite of fact. Inherited IRA required minimum distributions are based on age, so the amount required to be distributed annually will be minimal given Larry’s age, not aggressive.
Three core blocks removed, and our Dave Ramsey Jenga tower is getting weaker.
Fourth Jenga® Block: Annuities
Quincy recently asked via the “Dave Says” column: Are annuities any good?
Dave told Quincy that all fixed annuities are bad. This is my profession, and even I haven’t been able to examine each and every single fixed and fixed indexed annuity to make that assertion! Dave’s comment reminded me of the people who say that, All pit bulls are bad!, when in fact the animal’s disposition is hugely shaped by its owner.
Dave added that variable annuities can be good since “you can leave a beneficiary on it so that it passes outside of probate, and you’ve got some principal guarantees and return guarantees that are decent.”
Return guarantees? Dave Ramsey has confused guaranteed lifetime income benefit rider (LIBR) roll-ups for interest. LIBR increases are not interest, they cannot be taken as a lump sum, are generally not part of the death benefit, and in layman’s terms are purely an accounting figure to determine the maximum guaranteed lifetime income if it is ever elected. It is not interest.
Interestingly, Dave Ramsey has referred to people like myself as your “broke brother-in-law, stupid insurance agent.” But I’ll bet most insurance agents know the difference between LIBRs and interest. Furthermore, all insurance contracts specifically make this distinction.
If Dave Ramsey can recommend a variable annuity because of the LIBR, then isn’t it logical and rational to conclude Dave Ramsey can recommend a fixed and fixed index annuities as long as there’s a LIBR?
Logical and rational yes. But I doubt Dave will ever admit it.
One hallmark of this column: Bad math leads to bad advice, and bad advice hurts people. (Photo: iStock)
Fifth (and Final) Jenga® Block: Calculated Rate of Return
This is the mega block. It’s the block Dave Ramsey uses to support most all of his advice. It’s the 12 percent rate of return.
- Dave says cash value life insurance is bad because of the rate of return you can get by buying term insurance and investing the difference.
- Dave says annuities are bad because they won’t make 12 percent, which is what you’ll get with good growth stock mutual funds.
- Dave says to buy and drive jalopy mobiles so you don’t have a car payment. If you invest the money you’d pay for a car, then everyone retires a millionaire since they’ll get a 12percent or greater rate of return (he use to proclaim 18 percent).
Time to take out the block…
Anna recently asked via the “Dave Says” column: Should I stop paying life insurance premiums to pay off my house more quickly?
- She’s 65 and her husband is 82.
- They have $200,000 in combined life insurance at a cost of $10,000 per year.
- They have “nice pensions,” and owe $46,000 on their home.
Dave advice: “If I’m in your situation, I’d drop the life insurance policies and pay off the house as quickly as possible.”
This is easy math. According to the Social Security Administration, Anna’s husband has a life expectancy of less than 7 years. From my experience, couples typically carry more life insurance on the husband, especially when he’s 17 years older.
Without consideration to life expectancy, or risk, or rate of return, Dave gave his typical Frankenstein answer: “Cash value life insurance (is) bad, bad, bad.”
While I believe more than half the coverage is for the husband and more than half the premiums, we simply do not know. Given the assumption of half and half, the couple must have a rate of return between 25-30 percent to replace the $100,000 tax free death benefit by the end of the husband’s life expectancy. This varies depending on the assumptions we make for taxes.
Before any Ramsonites email me saying I’m wrong about this point, consider this: Dave Ramsey told Anna to use life insurance premiums to pay off the house. This means Anna and her husband won’t start to invest these dollars for at least 4 more years. That’s half of his life expectancy. Anna, by the way, is expected to live almost 20 more years.
If we’re going to suggest terminating life insurance coverage at this point in life, it would have been much more prudent to suggest eliminating Anna’s policy only.
I know Dave Ramsey is just trying to help. The problem is, he’s not licensed to help. He’s clearly not knowledgeable to help. Taxes, debt, IRAs, insurance, and calculating rate of return -are core blocks in a financial planner’s tower. Dave is dangerously inadequate in all of these.
Even with tons of conviction and a dash of delusion, falsity doesn’t transform into reality.
Read more “Seriously Dave?” columns by Michael Markey:
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