friendly financial advice

Could Dave Ramsey Be Misleading His Readers ?

A Case Study

The Challenge

dave-ramseyDave Ramsey is a nationally syndicated writer and financial advisor. His articles are read by millions of people and he frequently offers personal financial advice that some of his readers accept without question. In one of his columns, he addressed the question of paying off the mortgage or saving for retirement. Many of his readers are interested in this subject. After reading this post, you might want to question the advice you receive from syndicated “financial gurus”.

Dave’s Advice:

Dave compares two homeowners with similar incomes. Homeowner # 1 pays off her mortgage in 30 years and also contributes $500 per month to her 401(k). Homeowner #2 accelerates his mortgage by $500 per month, paying it off in 15 years before saving for retirement. Dave says that homeowner #1 will have $2 million dollars in retirement savings after 30 years. He says that homeowner #2 would have to save $2,600 per month for 15 years to have a similar amount.  He also says that homeowner #2 will have to save $288,000 more than homeowner #1 to have the same 401(k) balance. Dave Ramsey’s advice? Don’t accelerate mortgage. (link to article). But is he right? Read this article and you be the judge:

Accelerate Mortgage or Save and Invest?

Financial Security

Dave says that homeowner #1 will have $2 million in retirement savings after 30 years, having invested $500 per month. That number just didn’t sound right; it seemed very high. Using the financial calculator on Dave’s own website, I plugged in the numbers: $500 per month for 360 months grows to over $2 million  BUT ONLY IF THE ACCOUNT EARNS OVER 13% EACH YEAR FOR 30 YEARS!

13.1% Annual Growth For 30 Years???

Using a more realistic 6% growth rate, homeowner #1 would have just over $500,000 in her 401(k) after 30 years – a far cry from $2 million. It is misleading to tell readers that a 401(k) will grow by over 13% a year for 30 years. Dave also assumes that homeowner # 1 saves $500 per month while also making her mortgage payments. Few people can afford to save $500 a month while also paying a mortgage, Dave also assumes that a homeowner’s employment remains steady for 30 years, but in the global economy very few jobs last for 30 years.

This Is More Realistic

Dave concludes that homeowner 1 has more money saved in her 401k than the homeowner who accelerated his mortgage, and so his advice to readers is to NOT accelerate a mortgage but save and invest instead. But his advice is wrong. Using Dave’s own calculator, homeowner #2’s  401k is 50% larger than homeowner 1 when they reach retirement age.

Homeowner # 2, who accelerated his mortgage and paid it off in15 years, will have $770,000 in his 401(k) at the end of the same 30 period. That’s over 50% more than homeowner # 1’s 401(k). AND, homeowner # 2 also avoids the risk of carrying a mortgage for 30 years – a risk that no homeowner can afford as banks are aggressively forcing homeowners into foreclosure. Both 401(k) accounts grow by 6% annually.

50% More In The 401k By Accelerating A Mortgage

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Mortgage Acceleration = More Retirement $

Homeowner #2 accelerated his mortgage and had 53% more retirement savings.

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