What Is Dave Ramsey’s 8% Rule?

When people plan for retirement, they often hear about the 4% rule. But personal finance expert Dave Ramsey talks about something more aggressive: the 8% rule.

If you are confused about what this 8% rule means, how it works, and whether it is safe, this blog will explain everything in very simple language with clear examples and calculations.

What Is Dave Ramsey’s 8% Rule?

Dave Ramsey’s 8% rule for retirement says:

In retirement, you can withdraw 8% of your retirement savings in the first year, and then increase that amount every year for inflation, as long as your money is 100% invested in stocks (equity mutual funds).

In short:

Invest all your retirement money in stock-based mutual funds
Take out 8% of your starting portfolio value in the first year
Then every year increase this withdrawal by inflation (for example, 3%)

He believes this can work because he assumes:

Stock market returns in the long term are around 10%–12% per year on average
So if you earn 10–12% and withdraw 8% (plus inflation), you might still keep your money growing over time

Simple Example of the 8% Rule

Let’s take an easy example.

Example 1: Starting with $500,000

Retirement savings (portfolio): $500,000
Withdrawal rate (first year): 8%

Year 1:

8% of $500,000 =
500,000×0.08=40,000
So, in Year 1, you withdraw $40,000 to live on.

Now assume inflation is 3% every year. That means your yearly expenses go up by about 3%.

Year 2:

Increase last year’s withdrawal by 3%:
40,000×1.03=41,200
So, in Year 2, you withdraw $41,200.

Year 3:

Again increase by 3%:
41,200×1.03≈42,436
So, in Year 3, you withdraw around $42,436.

And this continues every year.

At the same time, Ramsey assumes your investments are earning around 10–12% per year, which he thinks can support these growing withdrawals.

How Is It Different from the Traditional 4% Rule?

Most financial planners talk about the 4% rule, which is much more conservative.

4% Rule (Traditional)

Invest in a mix of stocks and bonds (for example, 60% stocks, 40% bonds)
In Year 1, withdraw 4% of your portfolio
Then increase the dollar amount by inflation every year

This rule was created from historical studies that tried to find a safe withdrawal rate so that your money can last 30 years or more.

8% Rule (Dave Ramsey)

Invest 100% in stocks (no bonds, no other safer assets)
In Year 1, withdraw 8% of your portfolio
Then increase by inflation every year

This means the 8% rule:

Takes double the money out in the first year compared to the 4% rule
Uses a riskier investment mix (all in stocks)

So, the 8% rule gives you more income now, but also more risk of running out of money.

Why Does Dave Ramsey Believe 8% Can Work?

Dave Ramsey’s logic is based on long-term stock market returns.

He says:

The stock market has historically given around 10–12% average annual return over long periods.
If you:
- Earn around 10–12% per year, and
- Withdraw 8% per year (plus inflation),
- Your money might still grow overall.

In his view, if you stay 100% invested in good growth stock mutual funds for a long time, you can handle higher withdrawal rates like 8%.

However, this idea comes with big assumptions, which we’ll discuss next.

Big Assumptions Behind the 8% Rule

The 8% rule depends on some strong assumptions:

1. High Long-Term Returns

It assumes the stock market will keep giving average returns of around 10–12% for decades. But:

Future returns may be lower than the past.
There may be long periods where returns are weak.

2. 100% in Stocks

The rule assumes your portfolio is:

100% invested in stocks or stock mutual funds
No bonds, no fixed income, no cash for safety

This can lead to big ups and downs in your portfolio value.

3. You Can Handle Risk and Volatility

For this rule to work, you must:

Be emotionally comfortable with huge market drops
Avoid selling in panic during crashes

Many people in retirement cannot handle this level of risk because:

They depend on their portfolio for daily living
They don’t have a salary anymore
They may not have the time to recover from big losses

Sequence-of-Returns Risk: The Hidden Danger

One major problem with the 8% rule is something called sequence-of-returns risk.

This means:

The order in which you get your investment returns (good years vs bad years) can greatly decide whether your money lasts.

If you get bad returns early in retirement, and you are withdrawing a lot (like 8%), your portfolio can fall very fast.

Example 2: Bad Market in Early Years

Let’s again assume:

Starting portfolio: $500,000
Withdrawal: 8% in first year = $40,000
Then +3% inflation each year

Now imagine the stock market does this:

Year 1 return: –20% (big crash)
Year 2 return: –10%
Year 3 return: +15%

Let’s see what happens.

Start of Year 1:

Portfolio: $500,000

End of Year 1 (before withdrawal):

Market return –20%:
500,000×0.80=400,000500{,}000 \times 0.80 = 400{,}000500,000×0.80=400,000

Year 1 withdrawal:

8% of original $500,000 = $40,000

Portfolio after withdrawal:

400,000−40,000=360,000

So now you have only $360,000 left after just one bad year and one withdrawal.

Start of Year 2:

Portfolio: $360,000

Year 2 withdrawal (with 3% inflation):

Year 1 withdrawal = $40,000
Year 2 withdrawal = $40,000 × 1.03 = $41,200

Year 2 market return: –10%

First apply return:
360,000×0.90=324,000
Then withdraw $41,200:
324,000−41,200=282,800

Now, after just two years, your portfolio is down from $500,000 to $282,800.

Even if the market recovers later, you are now starting from a much smaller base. This is the danger of high withdrawals like 8% combined with bad early returns.

With a 4% rule, the withdrawals are smaller, so the damage is often less severe.

For Whom Might the 8% Rule Work?

Even though the 8% rule is risky, there are some situations where it might be more reasonable.

1. Shorter Retirement Period

If you:

Retire late (for example, at age 70 or 72), and
Expect a shorter retirement period (15–20 years instead of 30–35),

then a higher withdrawal rate like 6–8% might be less dangerous than for someone retiring at 60.

2. Very Large Portfolio

If your portfolio is very large compared to your spending needs, an 8% rule may still allow your money to last.

For example:

Portfolio: $3,000,000
8% withdrawal: $240,000 in first year
But if your actual lifestyle needs only $80,000 per year, then you don’t need to follow 8% at all. You can withdraw less and be super safe.

So in reality, people with big portfolios often don’t need an 8% rule.

3. Strong Risk Tolerance

Someone who:

Is very comfortable with stock market risk
Understands that their portfolio can fall 30–50%
Has other income sources (like rental income, business income, or pensions)

may choose a more aggressive strategy.

Still, for most ordinary savers, financial planners usually consider 8% too aggressive as a standard rule.

Pros and Cons of Dave Ramsey’s 8% Rule

Let’s break this into simple points.

Pros

Higher Income in Retirement
- 8% gives you more money to spend in the early years.
- You can enjoy travel, hobbies, and lifestyle upgrades while you are still healthy.
Motivates Higher Saving and Investing
- Ramsey often encourages people to invest more in growth mutual funds and stay focused on building wealth.
Simple to Understand
- The rule is easy to remember: “Withdraw 8% and keep invested in stocks.”
- No complicated formulas for most people.

Cons

Very High Risk of Running Out of Money
- 8% is double the 4% rule.
- If returns are lower than expected or the market crashes early, your money may not last 25–30 years.
Requires 100% in Stocks
- This is too risky for many retirees.
- Most traditional advice suggests a mix of stocks and bonds, especially as you get older.
Sequence-of-Returns Risk
- Bad early market years can destroy your portfolio when you are withdrawing a lot.
Not Suitable for Most Average Retirees
- Many people don’t have millions saved.
- If someone has $300,000–$500,000 only, 8% is usually too aggressive.
Emotional Stress
- Watching your portfolio fall by $100,000 or more in a bad year while still withdrawing money can be very stressful.

Comparing 4% Rule vs 8% Rule – Simple View

Feature	4% Rule	8% Rule (Dave Ramsey)
First-year withdrawal	4% of portfolio	8% of portfolio
Investment mix	Stocks + Bonds	100% Stocks
Risk level	Moderate	Very High
Income in early years	Lower	Higher
Chance of money lasting 30+ years (historically)	Higher	Lower (more failure risk)
Suitable for	Most average retirees	Only for high risk-takers / special cases

Should You Follow Dave Ramsey’s 8% Rule?

There is no one-size-fits-all answer, but here are some practical points.

You may consider the 8% idea only if:

You clearly understand the risks
You have a shorter expected retirement
You have other income sources (pension, rental, side business)
You are comfortable being 100% in stocks and seeing big drops

However, for most people, financial planners and research suggest that:

Something closer to 4%–5% withdrawal rate
With a diversified portfolio (stocks and bonds)

is usually safer and more realistic, especially for long retirements of 25–30+ years.

You can think about it this way:

4% rule = “slow and steady, more safety”
8% rule = “fast and bold, more danger”

Practical Tip: Create Your Own Flexible Rule

You don’t have to blindly follow any single rule.

Here’s a more balanced idea:

Start with a lower rate
- Maybe begin with 4%–5% in the first year.
Adjust according to market
- If the market does very well, you can slightly increase spending.
- If the market does badly, hold your spending steady or even reduce a little.
Keep some money in safer assets
- For example:
  - 60–70% in stocks
  - 30–40% in bonds or cash
- This gives you some protection during crashes.