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Wake up, Dave Ramsey: Your math is flawed

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Dave Ramsey uses Ramsey math.

Ramsey math makes something completely wrong sound completely right.

Related: Truth comes from flipping Dave Ramsey’s financial advice

Consider this:

On YouTube, under the heading “Dave Ramsey on Social Security,” you’ll find a nine minute Ramsey rant full of half-truths, no truths, fallacies, and Ramsey math. Ramsey once again hurts his listeners with bad math, which leads to bad advice, and bad advice does hurt people. Among the things he says in in this video:

          1. If we privatize just 2 percent of Social Security, then the 2 percent invested in “good growth stock mutual funds” would return 10-20 times what Social Security will pay.
          2. If he could stop paying his 15 percent Social Security tax, then he’d give up ALL of his Social Security benefits.

This might not sound mind-blowing at first. But I’m going to do my best to show you why financial nerds (like myself) are repelled by Ramsey and those like him.

According to the Motley Fool, as of December 2015, the average monthly Social Security benefits for men was $1,500 per month while for women it was $1,182 per month.

Related: 8 more Dave Ramsey myths debunked

The Social Security Administration’s (SSA) formula calculates benefits based on varying percentages at different tiers of AIME (average indexed monthly earnings). Wage indexing is similar to inflation, but historically has increased faster than inflation. This is important, so remember it for later.

Using the average benefits from Motley Fool, I’ve estimated the average annual wages for men and women at:

            • Men: $37,020 on average per year
            • Women: $25,080 on average per year

Back to Ramsey’s point: Invest 2 percent of your wages and you’ll have 10-20 times what the SSA will pay you.

To figure this out, we can’t simply take 2 percent of these wages for 45 years (age 20 to age 65). No, this would greatly skew the math since in earlier years the wages were lower. For simplicity, we’ll use 2 percent of wages above, but we’ll adjust the rate of return used by inflation.

According to finance and entertainment personality Dave Ramsey: "The current Social Security system sucks beyond belief!" (Photo: iStock)According to finance and entertainment personality Dave Ramsey: “The current Social Security system sucks beyond belief!” (Photo: iStock)

Using an inflation adjusted rate of return will partially offset the bias created by using wage indexing. This still gives a boost to Ramsey’s numbers and makes his point possibly more plausible; we’ll call this boost a handicap. They use a handicaps in golf and in bowling, so why not in finance? Given Ramsey’s lack of financial education, degrees, certificates, designations, licensing, training, and his awkwardness with simple mathematical principles, I think this is fair.

Related: Why Social Security planning is the new requirement for retirement advisors

Using 2 percent of wages, men can invest about $740 per year, while women about $500 per year. Since Social Security taxes are withheld each pay period, we’ll invest the dollars on a monthly basis ($62 for men and $42 for women).

Now we’ve got the amount to be invested each month and to get the inflation adjusted rate of return. Let’s turn to a chart at

Annual Averages per Decade

The following table shows average annual results for each decade:


Price Change

Dividend Dist. Rate

Total Return


Real Price Change

Real Total Return


13.2 %

5.4 %

19.3 %

2.2 %

10.7 %

16.7 %


4.4 %

3.3 %

7.8 %

2.5 %

1.8 %

5.2 %


1.6 %

4.3 %

5.8 %

7.4 %

-5.4 %

-1.4 %


12.6 %

4.6 %

17.3 %

5.1 %

7.1 %

11.6 %


15.3 %

2.7 %

18.1 %

2.9 %

12.0 %

14.7 %


-2.7 %

1.8 %

-1.0 %

2.5 %

-5.1 %

-3.4 %


7.2 %

3.6 %

11.0 %

3.8 %

3.3 %

7.0 %

Disclaimer: I’m using a table that shows average annual rates because this is what Ramsey uses. It’s not as flawed as Ramsey’s use of averages but I wanted to hedge that argument before it was made.

The bottom row of the chart shows the real rate of return adjusted for inflation over the last 60 years is 7 percent. But, in my head, I can hear Ramsonites saying, “This is unfair because these returns don’t include the bull market from March 2009 to present.”

(Yes, I hear voices in my head, but I rarely listen to them. So let’s move on…)

Eliminating 2009 until now does create a lower rate. If we input 10 percent annualized annual rate of return for the 2010’s decade, and input inflation at 0 percent, then the 70-year average is 8.5 percent. We’ll use both 7 percent and 8.5 percent, but adjust each by 1 percent to account for fees (regardless of commission or fee based).

Related: American workers lack confidence, feel stressed about retirement

After 45 years (age 20-65) here’s the final tallies:

          • Men: $167,778 (7 percent gross) and $265,585 (8.5 percent gross)
          • Women: $113,656 (7 percent gross) and $179,912 (8.5 percent gross)

Do you remember what the average monthly Social Security benefits were? I do.

They were $1,500 for men and $1,182 for women. Ramsey said, 2 percent of wages invested would equal 10-20 times what Social Security will ever pay. Let’s see how this pans out, shall we.

Ramsey isn’t necessarily wrong. If men get $18,000 annually, then with a 20 times multiplier Ramsey is correct as long as men die before collecting 8 months of benefits. At the 10 times multiplier, Ramsey can still be crowned Champion as long as men die before collecting 16 months. This blockbuster Ramsey flop occurred despite using an inflation adjusted return 8.5 percent.

The numbers don’t look any better for women. I could do the math with you but clearly, it’s not going to be much different. Ramsey’s assertion that 2 percent of your wages invested in good growth stock mutual funds would equate to 10-20 times what Social Security will pay is 100 percent false.

Related: Forward-thinking advisors focus on women

Ramsey’s second assertion was he’d be willing to give up ALL of his already paid for, already earned Social Security benefits in exchange for no longer having to pay 15 percent into Social Security. Like always, it’ll be helpful if we clear up some Ramsey miscues.

          • First: The amount Ramsey refers to as 15 percent is 15.30 percent. I’m not attacking Sir Noble Dave on this point, but rather clarifying.
          • Second: Of the 15.30 percent, only 12.40 percent goes to funding Social Security benefits.
          • Third: The 12.40 percent is paid half by the employer and half by the employee.
          • Fourth: The 12.40  percent is only paid on the first $118,500 of wages (which doesn’t include several different sources of income.)

Watch this. Ramsey says he’d give up ALL, not some, not most, but rather ALL of his already paid for — already earned Social Security benefits. This made me, and hopefully you, wonder two things:

          1. How much money would Ramsey save by no longer having to pay “the man.”
          2. How much in benefits is the Ramsey household expected to receive?

Mr. Ramsey was born on Sept. 3, 1960, so he’s 56 years old now. (“Stalk much,” you say? Again, with the voices?)

To determine a recipient’s Social Security benefits, the SSA uses a worker’s top 35 years of earnings adjusted by a formula as discussed earlier.  Benefits are capped by paying taxes on a maximum amount of wages, currently $118,500.

Although, Ramsey has 40 years of earnings (he says he first started paying into Social Security at 16 years old), some years were better than others. For instance, his early working years and the years between his bankruptcy and his return to the top of the financial food chain were similarly low. 

With a few basic assumptions, I estimated Ramsey’s PIA to be $3,260. PIA is an acronym for Primary Insurance Amount, which simply put is the monthly benefit he’s eligible for at his full retirement age of 67 years old.

Furthermore, we should also assume that Sharon Ramsey (Dave’s wife) hasn’t paid enough into the system for her worker’s benefit to eclipse the amount she’s eligible for using a spousal benefit.  I think this is prudent given these facts (jump past the bullet points if you’re not interested).

          • Ramsey hates SSA. He called it an “epic failure.”
          • Although, clearly mistaken, he believes he can do 10-20 times better with just 2 percent.
          • Sharon seems to not have worked much outside the home.
          • Even if she did work outside the home, it’s likely any significant income was produced by working at the Lampo Group (Ramsey’s evil empire).
          • If she does work for the Lampo Group, it’s unlikely Dave and Co. would ignore the fact wages (up to $118,500) would produce a Social Security tax liability since:
          • We’ve already assumed Dave’s wages are in excess of the max and hence the excess avoids the tax.
          • Even if paying into Sharon’s Social Security worker’s benefit, the amount paid to cause her worker’s benefit to exceed her spousal benefits would be significant.
          • Not sure if you realize, but Ramsey is NOT a fan of Social Security.
          • How many sub-points does word allow?
          • Apparently one more…

Taking Social Security benefits early will permanently reduce your lifetime benefits. (Photo: iStock)Taking Social Security benefits early will permanently reduce your lifetime benefits. (Photo: iStock)

Back to work!

For fun, let’s say after a wave of public outcry against Ramsey math and undisclosed conflicts of interest with product sponsors, Ramsey finally gives up and retires at 62. Thus, taking his Social Security benefits early, which he has often advised on his show, permanently reducing his lifetime benefits. Despite this, if Dave and Sharon live to life expectancy (about 80 and 84), they’re expected to receive $867,992 from Social Security.  That’s without any cost of living adjustments.

Two questions we wanted to answer. One, how much in benefits would he lose, which we now know would be $867,992; and two, how much would the saved dollars grow to if invested in “good growth stock mutual funds.” Time to answer the second question.

Ramsey is currently 56 years old but was only 50 when he made this statement. To be fair, ugh… I’ll do the math from 50. Like I said before, the amount paid into Social Security is 12.40 percent not 15 or more accurately 15.30 percent. Since Ramsey only ranted about Social Security we’ll only use 12.40 percent.

Assuming Ramsey’s wages meet or exceed $118,500, his wish to no longer pay into Social Security would net him $14,694 per year. Technically less, since he can deduct ½ of the amount paid towards self-employment tax (Social Security). At a 33 percent federal tax rate, the true amount to be invested is $12,269.

Again, I didn’t add inflation to Ramsey’s expected lifetime benefits, so we should eliminate inflation from the rate of return.

At age 62, Ramsey’s Social Security investment would be a measly $214,870 (7 percent gross).  Yeah, only $257,329… At 8.5 percent (gross) he’d have a whopping $237,656. Even at his famously wrong and disputed 12 percent (net), Ramsey would only have $326,227. Even the 8 percent withdrawal rate Ramsey tells listeners they can “safely” take that’s only $31,255.

If Dave and Sharon both take Social Security at the earliest date, they’d get, given the earlier assumptions listed, $40,332 per year. That’s almost ten grand a year more than Ramsey’s plan which uses an anything but ‘safe’ rate of withdrawal.

Here comes the boom!

In order to withdraw the amount they’d get from Social Security, the Ramsey’s would need to withdraw 19 percent annually at a 7 percent gross rate of return, 17 percent annually at a 8.5 percent gross rate of return, and 12 percent annually at a 12 percent net rate of return.

At best, the withdrawal rate needed is still 50 percent greater than the extremely unsafe rate Dave already uses. Does Ramsey consult with anyone prior to making these assertions? Bad math, leads to bad advice, and bad advice DOES hurt people.

As if this math wasn’t bad enough, we forgot to consider Ramsey makes this assertion to his listeners based on investing the entire amount paid into Social Security. Most of his listeners aren’t self-employed and would only be able to invest half.

During the nine-minute rant against Social Security, Ramsey shouts: “God people, Wake Up!”

No Dave, you wake up. Your math is flawed. You give bad tax advice. You give bad investment advice. You evade the scrutiny of financial regulators by using clever words like “counseling” and by using phrases like “here’s what I would do.”

If you have nothing to hide, then stop hiding.

See also:

In 2017, advisors must monitor Social Security and Medicare reform

Do you know these Social Security facts?

How to maximize Social Security benefits for women


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