Dave Ramsey’s debunking debacle on retirement income
May 29, 2015 by Kevin Startt
In Georgia, we celebrated Tax Freedom Day on April 15, a little before the folks on the West Coast who celebrate Tax Freedom Day about three months later. Their plight is similar to what a German executive at Deutsche Bank told me years ago about why so much drinking, celebrating and carousing goes on during Oktoberfest. In Germany, Tax Freedom Day used to occur well into September, and all of the extracurricular activity was necessary to relax. Auf Wiedersehn.
I’m always reminded of how gifted my accountant is when I ask him the difference between a 10-K and a 401(k), and he responds “391.” I also recognize that financial shock jock Dave Ramsey is so often debunked that the bunk beds are missing a mattress or two. Quite candidly, I agree with about 90 percent of what Dave has to say in his many books and through Financial Peace University. He has helped my family and many of my client’s family’s as well, but I have a couple more bones to pick, in addition to what other advisors have said, that I believe are legitimate.
Dave always advocates buying term life insurance and investing the difference, but deplores the idea of leasing an automobile. Even though this is a sound concept in practice, it has been demonstrated time and again that folks don’t invest the difference. When they do, Dave is advocating a mutual fund that averages 12 percent. This is without accounting for risk and negating the fact that an exchange-traded fund, with a similar investing style and objective, may cost significantly less. If everyone that bought life insurance invested the difference, perhaps we wouldn’t have a retirement crisis staring us in the eye.
My major beef is that Dave’s advocacy of renting versus owning is flawed and contradictory. He believes in renting an insurance policy for a “term” or period of time, but lambasts the idea of employing the same concept when it comes to renting an automobile through a lease agreement and investing the difference. That being said, the same investing dilemma is present as with term life insurance. Leasing is ideal for someone who needs to drive a new car every three to four years.
Also, does Dave not realize that the commercial airline industry saves hundreds of millions of dollars each year through leasing, according to Ascend? Last year alone, Ascend calculated over 40 percent of all commercial aircraft were leased, which contributed to an improved earnings outlook in the industry. Are airline executives missing something by not buying all their depreciating aircraft?
Finally, in leaving the bunk behind, Dave Ramsey and Clark Howard, besides detesting annuities, have a bone to pick with buying long-term care insurance too early. This conclusion comes even though, according to Genworth, over 30 percent of the population less than 50 years of age have a time in their earlier life when they cannot perform two of six activities of daily living (ADL). My friend in Georgia, Herb Silverman, can attest to the fact that strokes at age 27 can happen outside the workplace and can be life changing. The magic age, though, for Dave and Clark seems to be in the late 50s.
I believe thousands of people who need long-term care are not buying it because they are listening to this questionable advice. If all of us had listened to this advice in our late 40s, as I may have 10 years ago, we would not only have missed a morbid risk, but also may not have lived to tell about it. You see, according to Barron’s April 11 edition, there were close to 100 carriers in the business in 2005. These carriers offered my wife and I shared benefits, at home care, 10-15 pay limited options, a generous benefit pool, a cost of living rider and many other incentives. Like so many others, I have not lapsed the policy, and we have seen the same low interest rates that have affected LTC carriers.
We have peace of mind knowing that despite downsizings, cancer, parental Alzheimer’s, and other health challenges, we only have six more payments, and we will be taken care of for the rest of our lives at a calculable expense. Our retirement income will not have to be tapped, and our private retirement plan or personal pension can continue to grow, despite listening to Clark and Dave. If we had waited to our late 50s, dozens of carriers would have gone out of business and benefit provisions would have been sliced and diced.
I appreciate what Dave does. The average employee changes jobs 11 times in their career, according to the Department of Labor. Thus, very few employers are offering long-term care. The financial stress levels of being laid off during your peak earning years makes long-term care an easy decision for someone in their late 40s, regardless of family history or Dave Ramsey or even my accountant, who lets me write off a little bit of the premium payment each year as well.