Following Ramsey's advice could hurt your retirement prospects.
Dave Ramsey is a finance expert offering advice on many issues, including where you should put your retirement money.
Ramsey gave some good suggestions about what kinds of brokerage accounts you should be putting your money into. But, when it comes to suggesting assets to invest in, he's given some very bad advice that you likely should not follow.
Specifically, Ramsey recommended mutual funds over exchange-traded funds for most retirement investors. And he gave some explanations for this recommendation, most of which highlight just how incorrect he is. Here are two reasons Ramsey is dead wrong.
1. Ramsey says actively managed mutual funds are worth paying more for
When comparing mutual funds and exchange-traded funds, Ramsey acknowledged that mutual funds can have higher fees than ETFs. But, he suggests, that could be a good thing if you're paying for a fund manager to personally select assets.
"ETFs are managed passively (the fund just follows the market index) while mutual funds are managed actively by investment professionals," Ramsey explained. "The goal of having someone actively managing your mutual fund is to benefit from their expertise and beat average market returns. That makes mutual funds a little more expensive to own than ETFs, but the idea is you'll benefit from stronger returns."
There are some big problems with this advice, though.
Most importantly, actively managed investments very rarely, if ever, outperform market indexes over the long term -- especially after factoring in the fees that fund managers charge. In the rare cases where active investing does net higher returns, it's usually in situations where wealthy investors are purchasing assets regular people can't access.
Why would you ever want to take a chance on paying more for a fund manager to pick your stocks when the odds are very good that you'd do better with a cheaper passively managed ETF?
2. Ramsey says index mutual funds can be a better buy than ETFs
Ramsey suggested that if you do want to engage in passive investing, you're better off doing it with an index mutual fund than with an ETF that tracks a market or financial index.
His reasoning: Mutual funds are meant to be invested in over the long term, while ETFs trade daily. He goes on to argue that mutual funds allow you to avoid brokerage fees often charged by ETFs.
There's problems with this advice, too, though. ETFs can also be held for as long as you'd like, even though they do trade like stocks. So there's no reason long-term investors can't opt for an ETF. And many brokerage firms offer more options for commission-free ETFs than mutual funds. So, you could have a broader choice of fee-free investments if you opted for ETFs instead.
For these key reasons, Ramsey's advice isn't the best on this issue. If you want to build a retirement nest egg that provides the security you deserve and you don't want to pick individual stocks, an ETF could be a way better bet than most mutual funds would be.
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FAQs
Investing Principle 2: Invest 15% of your income in tax-advantaged retirement accounts. Once you've completed the first three Baby Steps, you're ready for Baby Step 4—investing 15% of your household income in retirement. This is where things get really exciting!
What are the 4 areas of investment Dave Ramsey? ›
That's why we recommend splitting your investments evenly (25% each) between four types of stock mutual funds: growth and income, growth, aggressive growth, and international.
How much does Dave Ramsey say you should invest? ›
When it comes to saving for retirement, money expert Dave Ramsey knows exactly how much you should be setting aside. Ramsey's recommendation, which he shared on his website Ramsey Solutions, is to invest 15% of your gross income into your 401(k) and IRA every month.
What does Dave Ramsey say about taking social security at 62? ›
Here's when Ramsey said you can claim Social Security at 62
The question focused on whether to start retirement benefits at 62 or wait until full retirement age. In response, Ramsey said that "it usually makes sense to take it early if you're going to ... invest every bit of it."
Where is the best place to put retirement money? ›
A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly. A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly.
What are common retirement investing mistakes? ›
Most Common Retirement Mistakes
| Rank | Most Common Mistakes | Share |
|---|
| 1 | Underestimating the impact of inflation | 49% |
| 2 | Underestimating how long you will live | 46% |
| 3 | Overestimating investment income | 42% |
| 4 | Investing too conservatively | 41% |
6 more rowsJan 8, 2024
Dave Ramsey's advice is to save 5% into the TSP to get the full match, then max out a Roth IRA, and then put more into the TSP if you are able to save more after that.
What are the 3 A's of investing? ›
Amount: Aim to save at least 15% of pre-tax income each year toward retirement. Account: Take advantage of 401(k)s, 403(b)s, HSAs, and IRAs for tax-deferred or tax-free growth potential. Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.
What is the rule of 72 used for? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the 80 20 rule Dave Ramsey? ›
There's an 80-20 rule for money Dave Ramsey teaches which says managing your finances is 80 percent behavior and 20 percent knowledge. This 80-20 rule also applies to constructing a healthy life. Personal wellness is 80 percent behavior and 20 percent knowledge.
Some folks will need $10 million to have the kind of retirement lifestyle they've always dreamed about. Others can comfortably live out their golden years with a $1 million nest egg. There's no right or wrong answer here—it all depends on how you want to live in retirement!
How much is $100 a month for 40 years? ›
According to Ramsey's tweet, investing $100 per month for 40 years gives you an account value of $1,176,000.
What is the average Social Security check at age 65? ›
Whatever the case, the average monthly Social Security payment being made to 65-year-olds in 2024 is $1,505. That's $18,060 per year. The figure could have been smaller, by the way. The average payment for anyone claiming benefits at the earliest possible age, 62, is a little less than $1,300.
How do I get the $16728 Social Security bonus? ›
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
At what age does Social Security not care how much you make? ›
later, then your full retirement age for retirement insurance benefits is 67. If you work, and are at full retirement age or older, you may keep all of your benefits, no matter how much you earn.
What is the $1000 a month rule for retirement? ›
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
How much does Suze Orman say you need to retire? ›
"If you don't have at least $5 million or $10 million, don't retire early," Suze asserted.
