Personal finance guru Dave Ramsey is well known for his advice on getting out of debt and building wealth. A big part of his teachings focuses on retirement planning and saving enough money to retire comfortably. Here is an overview of Dave Ramsey’s main tips for retirement planning.
Start Saving Early and Often
Dave Ramsey strongly encourages people to start saving for retirement as early as possible. He recommends beginning retirement contributions in your 20s or 30s in order to take advantage of compound interest over time. The longer your money has to grow tax-deferred in a retirement account like a 401(k) or IRA, the more wealth you can build.
Ramsey says you should save at least 15% of your income for retirement starting as soon as you begin working. This includes any matching contributions from your employer. The key is making retirement contributions a priority in your budget from an early age.
Use Retirement Accounts, Not Just Savings
Simply putting money into a regular savings account won’t cut it for retirement saving, according to Ramsey. He says you need to use tax-advantaged retirement accounts like 401(k)s, 403(b)s, IRAs, etc. These accounts allow your money to grow tax-deferred and compound at a faster rate. Ramsey’s recommended order for retirement saving is:
- 401(k) up to the full employer match
- Roth IRAs
- Back to maxing out 401(k)
- Taxable brokerage account
Once you’ve contributed up to your employer’s 401(k) match, Ramsey says to focus on maxing out Roth IRAs, then return to maxing your 401(k), and finally contribute any additional funds to a taxable account.
Invest Aggressively When You’re Young
Dave recommends having a high percentage of stocks (80-90%) in your retirement portfolio when you are in your 20s, 30s, and 40s. Stocks carry higher risk but have much greater long-term return potential than other assets like bonds. The longer time horizon you have before retirement, the more risk and volatility you can withstand in your accounts.
As you approach retirement age, Ramsey advises gradually shifting your asset allocation more towards bonds to reduce risk. But in your early saving years, he says stocks are the way to maximize growth.
Have a Written Retirement Plan
Ramsey stresses the importance of having a clear written plan for your retirement savings and investments. This includes setting a retirement savings goal amount based on your desired income in retirement. It also involves writing out an investment policy statement to define your asset allocation and rebalancing strategy.
Having a solid retirement plan on paper helps you follow a logical path to reach your goals rather than making knee-jerk reactions to market swings. It also keeps you disciplined about regularly contributing to your retirement accounts.
Aim to Save 10-15 Times Your Income
How much money exactly should you aim to save by retirement? Ramsey recommends striving to save 10-15 times your annual income by retirement age. So for example, if you earn $100,000 per year, you would want to accumulate $1 million to $1.5 million in retirement savings.
This savings target is based on the 4% rule – the idea that you can safely withdraw 4% of your nest egg each year in retirement for 30 years without running out. So a $1 million portfolio could provide $40,000 in annual income.
Pay Off Your House Pre-Retirement
Owning your home outright is a big part of Ramsey’s retirement plan recommendations. He advises paying off your mortgage before you retire so you eliminate that monthly expense in retirement. This allows more of your retirement income to go towards fun rather than housing costs.
If you aren’t able to pay off your mortgage entirely, Ramsey says paying it down as much as possible should still be a priority in the years leading up to retirement.
Have Multiple Income Sources
Rather than relying solely on 401(k)s and IRAs to provide retirement income, Ramsey suggests having money coming in from multiple sources:
- 401(k)/IRA withdrawals
- Social Security income
- Pensions if applicable
- Income from rentals or side businesses
- Dividends from a brokerage account
Having diverse income streams creates a buffer so you aren’t overly dependent on the markets or one account for your livelihood in retirement.
Delay Social Security Until Age 70
While you can start claiming Social Security as early as age 62, Ramsey recommends waiting until age 70 if possible. Each year you delay claiming past your full retirement age (currently age 67), your benefit amount goes up. Delaying until 70 allows you to maximize this increase.
Waiting also enables you to keep growing your retirement accounts in those extra years. If you’ve retired early with enough savings, Ramsey advises living off your personal savings first so you can hold off on tapping Social Security.
Build Wealth Along the Way
Ramsey points out that retirement savings isn’t just about stashing money away for later. Building wealth through your working years enables you to live a richer life all along the way. As your net worth grows, you gain access to opportunities you wouldn’t otherwise have.
Wealth building also provides cash flow to invest in areas like real estate, which can become an income stream in retirement. Ramsey sees retirement saving as just one aspect of an overall financial plan and lifestyle.
Keep an Emergency Fund
Having cash reserves is another key pillar of Ramsey’s retirement advice. He recommends keeping 3-6 months of expenses in a liquid emergency fund even after you retire. This prevents you from having to tap retirement accounts when unexpected costs arise.
The emergency fund protects your nest egg and gives you more flexibility to handle surprise medical bills, home repairs, and other unplanned costs common in retirement.
Have Insurance Protection
Being adequately insured is vitally important in retirement, according to Ramsey. This includes health insurance to cover rising medical costs. He advises having long-term disability insurance coverage until at least age 65.
Long-term care insurance is also worth considering to protect yourself from catastrophic care costs. An umbrella liability policy can also give added protection for your assets.
Know Your Retirement Costs
To determine your retirement savings goal, Ramsey says you need to have a realistic estimate of your expenses in retirement. These will likely include:
- Healthcare – Medicare premiums, copays, medigap policies
- Housing – rent/mortgage, property taxes, insurance
- Food
- Transportation – car payments, insurance, gas
- Travel and entertainment
- Personal care
- Gifts and donations
Accounting for all your likely costs will help you estimate the annual income you’ll require. From there, you can calculate the size of your needed retirement nest egg.
Live Below Your Means
Ramsey is a big proponent of living on less than you earn, at every stage of life including retirement. Tracking your expenses and creating a realistic budget are key. Limiting lifestyle inflation and discretionary spending are wise moves throughout your retirement years.
Having an affordable lifestyle ultimately allows you to save more which means you need a smaller nest egg. Living below your means gives your savings the chance to last longer.
Consider Downsizing Your Home
As you enter retirement, Ramsey recommends assessing whether downsizing your home could make financial sense. Moving to a smaller, less expensive house can free up equity that can bolster your retirement funds.
Even if you keep the same home, paying off your mortgage eliminates what’s often a retiree’s largest monthly cost. This can open up more room in your budget to pursue your goals and hobbies.
Relocate Somewhere Affordable
Besides downsizing your home, Ramsey suggests looking at retiring in a less expensive city or state. Places like Florida and Texas have climates attractive to retirees. But even moving from an expensive metro to a neighboring suburb can yield savings.
Crunching the numbers for different locations can reveal significant housing and tax savings that boost your retirement nest egg’s buying power. Sometimes staying near family trumps money factors, but it’s worth running the scenarios.
Pay Cash for Cars
Ramsey advocates buying vehicles with cash at every stage of life, including in retirement. While you may have smaller car payments or none at all in retirement, he says owning your car outright gives you options.
You can sell the car for cash if needed. Or you can drive it longer since you owe nothing on it. Car debt ties up cash flow that could be boosting your retirement funds instead.
Work Part-Time If Needed
If money is tight in the early retirement years, Ramsey says working part-time is a better option than tapping retirement accounts too soon. Earning income gives your savings more time to grow.
Part-time work or side gigs can also keep you engaged and provide a sense of purpose. Just be sure you’re still leaving adequate time for relaxation and enjoyment in retirement.
Conclusion
Dave Ramsey’s retirement advice centers around starting to save early with intensity, investing wisely, eliminating debt, living within your means, and planning intentionally. His tips are designed to help everyday Americans retire with dignity through practical money management principles. With commitment and discipline, his strategies can help position you for a comfortable retirement.