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March 23, 2017 at 10:30 AM
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:
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- 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.
- If he could stop paying his 15 percent Social Security tax, then he’d give up ALL of his Social Security benefits.
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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:
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- Men: $37,020 on average per year
- Women: $25,080 on average per year
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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)
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 simplestockinvesting.com.
Annual Averages per Decade
The following table shows average annual results for each decade:
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Price Change |
Dividend Dist. Rate |
Total Return |
Inflation |
Real Price Change |
Real Total Return |
| 1950′s |
13.2 % |
5.4 % |
19.3 % |
2.2 % |
10.7 % |
16.7 % |
| 1960′s |
4.4 % |
3.3 % |
7.8 % |
2.5 % |
1.8 % |
5.2 % |
| 1970′s |
1.6 % |
4.3 % |
5.8 % |
7.4 % |
-5.4 % |
-1.4 % |
| 1980′s |
12.6 % |
4.6 % |
17.3 % |
5.1 % |
7.1 % |
11.6 % |
| 1990′s |
15.3 % |
2.7 % |
18.1 % |
2.9 % |
12.0 % |
14.7 % |
| 2000′s |
-2.7 % |
1.8 % |
-1.0 % |
2.5 % |
-5.1 % |
-3.4 % |
| 1950-2009 |
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:
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- 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)
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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.
Taking Social Security benefits early will permanently reduce your lifetime benefits. (Photo: iStock)