Dave Ramsey Investment Calculator

Dave Ramsey uses 7% as the expected long-term average return for stock market investments, specifically adjusted for inflation. THE 7% CALCULATION: • Historical S&P 500 average: ~10-11% annually • Average inflation rate: ~3% annually • Real (inflation-adjusted) return: ~7% WHY THIS MATTERS: • 10% nominal return sounds great, but inflation erodes purchasing power • $1 million in 30 years won't buy what $1 million buys today • 7% gives you the "real" growth in purchasing power DAVE RAMSEY'S REASONING: • Based on historical data from 1928 to present • Accounts for market ups and downs • Provides a realistic planning number • Conservative enough for retirement planning IMPORTANT CAVEATS: • Past performance doesn't guarantee future results • Individual years vary dramatically (-37% to +54%) • Long-term consistency is the key assumption • Requires staying invested through market downturns

The 4% rule is a retirement withdrawal strategy developed by financial planner William Bengen in 1994. THE BASIC RULE: • Withdraw 4% of your portfolio in year 1 of retirement • Adjust that amount for inflation each subsequent year • Your money should last at least 30 years EXAMPLE ($1,000,000 portfolio): • Year 1: Withdraw $40,000 (4%) • Year 2: Withdraw $41,200 (adjusted for 3% inflation) • Year 3: Withdraw $42,436 (compounding adjustments) • Continue annually, adjusting for inflation WHY 4% WORKS: • Based on historical worst-case scenarios • Assumes 50/50 stock/bond portfolio • Accounts for market crashes and recoveries • Trinity Study confirmed it historically MODERN CONSIDERATIONS: • Some experts now suggest 3.5% for longer retirements • Others argue 4.5% is safe for shorter periods • Flexibility helps: reduce spending in bad markets • Social Security can supplement income DAVE RAMSEY'S VIEW: • Uses 4% as a conservative guideline • Emphasizes becoming debt-free first • Recommends living on less than you make • Suggests having paid-off home by retirement

Compound interest is often called the "8th wonder of the world" and is the foundation of Dave Ramsey's wealth-building strategy. HOW IT WORKS: • Year 1: You earn interest on your principal • Year 2: You earn interest on principal + last year's interest • Year 3+: Interest earns interest, creating exponential growth COMPOUND INTEREST EXAMPLE ($10,000 at 7%): • Year 5: $14,026 (+$4,026) • Year 10: $19,672 (+$9,672) • Year 20: $38,697 (+$28,697) • Year 30: $76,123 (+$66,123) • Year 40: $149,745 (+$139,745) THE POWER OF TIME: • More time = dramatically more money • Starting at 25 vs 35 can DOUBLE your wealth • $500/month for 40 years at 7% = $1.2 million • $500/month for 30 years at 7% = $586,000 DAVE RAMSEY'S BABY STEPS: 1. $1,000 emergency fund 2. Pay off all debt (except house) 3. 3-6 months emergency fund 4. Invest 15% of income 5. Save for kids' college 6. Pay off house early 7. Build wealth and give

Dave Ramsey recommends a specific investment strategy focused on growth-oriented mutual funds. DAVE'S RECOMMENDED PORTFOLIO: • 25% Growth funds • 25% Growth and Income funds • 25% Aggressive Growth funds • 25% International funds WHY MUTUAL FUNDS: • Professional management • Instant diversification • Lower risk than individual stocks • Proven long-term performance WHAT TO AVOID: • Individual stocks (too risky) • Bonds (lower returns for younger investors) • Whole life insurance (bad investment vehicle) • Variable annuities (high fees) • Gold and precious metals WHERE TO INVEST: • Employer 401(k) with match (free money!) • Roth IRA (tax-free growth) • Traditional IRA if no 401(k) match • HSA if eligible (triple tax advantage) INVESTMENT ORDER: 1. Get 401(k) match (100% return!) 2. Max out Roth IRA ($7,000/year in 2024) 3. Go back to 401(k) up to 15% of income 4. Taxable brokerage if you can invest more

Dave Ramsey has specific prerequisites before you should start investing, outlined in his "Baby Steps" plan. BEFORE INVESTING (Baby Steps 1-3): 1. Save $1,000 emergency fund 2. Pay off ALL debt except mortgage (debt snowball) 3. Build 3-6 months expenses in savings THEN START INVESTING (Baby Step 4): • Invest 15% of household income • Use tax-advantaged accounts first • Stick with good growth mutual funds • Continue regardless of market conditions WHY WAIT UNTIL DEBT-FREE: • Debt interest works against you • Average credit card rate: 20%+ • Can't out-invest high-interest debt • Psychological freedom matters THE MATH EXAMPLE: • $5,000 credit card at 20% = $1,000/year in interest • $5,000 invested at 7% = $350/year growth • Paying debt first gives better return EXCEPTIONS: • Always get employer 401(k) match (it's free money) • Don't stop during debt payoff if getting match • Resume full 15% investing after debt-free TIME IS CRITICAL: • Start investing at 25: retire as millionaire • Start at 35: need to invest 2x as much • Start at 45: need to invest 4x as much

Dave Ramsey's clear recommendation: invest 15% of your gross household income for retirement. WHY 15%: • Balances retirement savings with current life • Accounts for Social Security supplementing • Allows for other financial goals (kids' college, house payoff) • Historically builds significant wealth CALCULATION EXAMPLE ($75,000 income): • 15% = $11,250/year • Monthly = $937.50 • With employer match, could be less from paycheck HOW TO REACH 15%: • Start where you can (even 3%) • Increase 1% each year • Put raises toward investing • Add bonuses to investment INVESTMENT PRIORITY: 1. 401(k) up to employer match 2. Roth IRA ($7,000 max in 2024) 3. Back to 401(k) to reach 15% 4. HSA if eligible 5. Taxable brokerage if above 15% WHAT NOT TO COUNT: • Employer match (bonus, not your 15%) • Social Security contributions • Pension contributions • Real estate investments IF YOU STARTED LATE: • Age 40+: Consider 20-25% • Age 50+: Catch-up contributions available • $7,500 extra in 401(k) if 50+ • $1,000 extra in IRA if 50+

The 7% return assumption is debated, but historically reasonable for long-term equity investing. HISTORICAL EVIDENCE: • S&P 500 (1928-2023): ~10% nominal • Inflation-adjusted: ~7% real return • Even including Great Depression, 2008 crash • Long-term trend has been consistent ARGUMENTS FOR 7%: • 95-year track record • U.S. economy continues growing • Corporate profits trend upward • Innovation drives returns ARGUMENTS AGAINST: • Future may differ from past • Lower interest rates globally • Higher valuations today • Some predict 5-6% going forward DAVE RAMSEY'S POSITION: • Sticks with 7% for planning • Uses it as real (inflation-adjusted) return • Emphasizes long-term perspective • Acknowledges year-to-year volatility PRACTICAL APPROACH: • Use 7% for optimistic planning • Use 5-6% for conservative planning • The key is consistent investing • Market timing doesn't work VOLATILITY REALITY: • Some years: +30% or more • Some years: -30% or more • Average is smooth; reality is bumpy • Must stay invested through downturns

The key difference is WHEN you pay taxes: now (Roth) or later (Traditional). ROTH IRA/401(k): • Contributions with after-tax money • Grows tax-free • Withdrawals in retirement: TAX-FREE • No required minimum distributions (Roth IRA) TRADITIONAL IRA/401(k): • Contributions with pre-tax money • Grows tax-deferred • Withdrawals in retirement: TAXED as income • Required minimum distributions at 73 DAVE RAMSEY'S PREFERENCE: ROTH • Tax-free growth is powerful • Tax rates may be higher in future • More flexibility in retirement • No RMDs forcing withdrawals WHEN TRADITIONAL MAKES SENSE: • Very high tax bracket now • Expect much lower taxes in retirement • Need the upfront tax deduction • Employer only offers Traditional 401(k) CONTRIBUTION LIMITS (2024): • IRA: $7,000 ($8,000 if 50+) • 401(k): $23,000 ($30,500 if 50+) • Can have both types BACKDOOR ROTH: • For high earners over Roth income limits • Contribute to Traditional, convert to Roth • Pay taxes on conversion • Legal and commonly used strategy

Dave Ramsey's approach uses the 4% rule to calculate how much you need to retire. THE FORMULA: Retirement Number = Annual Expenses × 25 EXAMPLE: • Want $60,000/year in retirement • $60,000 × 25 = $1,500,000 needed • 4% of $1.5M = $60,000/year income FACTORS TO CONSIDER: • Paid-off house reduces expenses • Healthcare costs (major expense) • Inflation over time • Desired lifestyle DAVE RAMSEY'S MODIFICATIONS: • Pay off house before retirement • Live on 70-80% of current income • Social Security supplements savings • Stay out of debt in retirement ALTERNATIVE CALCULATIONS: • 80% rule: Need 80% of pre-retirement income • Expense-based: Track actual expenses • Hybrid: Mix of approaches REALITY CHECK: • $1M portfolio = $40,000/year (4%) • $2M portfolio = $80,000/year (4%) • $3M portfolio = $120,000/year (4%) REACHING YOUR NUMBER: • $500/month at 7% for 40 years = $1.2M • $1,000/month at 7% for 30 years = $1.2M • $2,000/month at 7% for 20 years = $1.0M

Dave Ramsey views Social Security as a supplement, not a primary retirement plan. DAVE'S POSITION: • Don't count on it as your main income • Government programs can change • Build wealth independently • Social Security is a bonus SOCIAL SECURITY FACTS: • Full retirement age: 66-67 (depending on birth year) • Early retirement: 62 (reduced benefits) • Delayed retirement: Up to 70 (increased benefits) • Maximum benefit (2024): ~$4,873/month HOW IT'S CALCULATED: • Based on 35 highest-earning years • Higher earnings = higher benefits • Adjusted for inflation • Spousal benefits available CURRENT CONCERNS: • Trust fund projected to deplete by 2033 • Would result in ~23% benefit reduction • Congress will likely address (politically difficult) • Benefits probably not disappearing entirely PLANNING STRATEGY: • Calculate retirement number WITHOUT SS • Add Social Security as bonus income • Provides cushion for unexpected expenses • Allows for more generous retirement WHEN TO CLAIM: • 62: Reduced benefits (permanently) • 67: Full benefits • 70: Maximum benefits (8%/year increase) • Break-even typically around age 80 DAVE'S ADVICE: • Don't factor it into your investment calculation • Build wealth through investing 15% • Live below your means • Retire with paid-off home

Inflation is the "silent wealth killer" that Dave Ramsey accounts for in his 7% return assumption. WHAT IS INFLATION: • Rising prices over time • Decreasing purchasing power • $1 today ≠ $1 in 30 years • Historical average: ~3%/year INFLATION'S IMPACT: • $1,000,000 in 30 years • At 3% inflation: worth ~$412,000 in today's dollars • Need more money to maintain lifestyle • Retirement expenses keep rising HOW DAVE RAMSEY ACCOUNTS FOR IT: • Uses 7% "real" return (after inflation) • Historical nominal return: ~10% • Minus ~3% inflation = ~7% real • Your projections are in TODAY's dollars INFLATION EXAMPLES: Item 1990 2024 Increase Coffee $0.50 $2.50 400% Movie ticket $4.00 $15.00 275% Gas (gallon) $1.15 $3.50 204% House $80K $400K 400% PROTECTING AGAINST INFLATION: • Invest in stocks (outpace inflation) • Avoid keeping too much in savings • Real estate typically keeps pace • Bonds lag behind inflation RETIREMENT INFLATION RISK: • 25-year retirement = significant erosion • Healthcare costs rise faster than general inflation • Social Security has COLA adjustments • Must plan for increasing expenses

Dave Ramsey's advice: Start where you are and increase over time. GETTING STARTED: • Any amount is better than nothing • Compound interest needs TIME • Start with 3%, 5%, or whatever you can • Increase by 1% each year PRACTICAL STRATEGIES: 1. Get employer match (it's free money!) 2. Automate contributions 3. Budget to find extra money 4. Use raises for investing FINDING MONEY TO INVEST: • Cancel unused subscriptions • Reduce dining out • Lower phone/internet bills • Drive older cars longer • Shop sales and use coupons DAVE'S BABY STEPS CONTEXT: • Baby Step 4 is invest 15% • But only AFTER Steps 1-3 • Pay off debt first (except mortgage) • Build 3-6 month emergency fund INCREMENTAL APPROACH: Year 1: 3% + employer match Year 2: 5% + employer match Year 3: 8% + employer match Year 4: 12% + employer match Year 5: 15% + employer match EMPLOYER MATCH IS KEY: • If employer matches 3%, that's 6% total • Free money you can't afford to skip • Immediate 100% return on matched portion • Never leave match on the table