The Problem With Planning Retirement on a 12% Average Return

I have a love/hate relationship with Dave Ramsey.

He’s great for people who are deeply in debt or bad with money – he’s gotten millions of people onto solid financial footing who’d never have gotten there otherwise. But his usefulness starts to fade once you ARE on solid footing (”Baby Step 4” and beyond, in his parlance).

And some of his advice in those more “advanced” areas is plain bad, even bordering on dangerous.

Case in point: his claim that the stock market returns an average of 12% a year.

But my qualms aren’t necessarily with the claim itself – it's more about how that claim gets interpreted by his audience. Most people hear 12%, assume they can count on it every year, and build their retirement plan on it.

And THAT’S where the danger is.

Why a 12% plan falls short

Unless you’re truly earning 12% year in and year out with zero negative years (and in the stock market, you’re not), a plan built on a steady 12% will fall short of its projections. And depending on the timeframe, it can fall WAY short.

Losses cost more than they appear on first glance. Lose 15% one year and you need nearly an 18% gain the next just to get back to even.

A projection built on a steady 12% never loses a year to recovery. But that’s not how it works in the real world – the S&P has had 26 losing years out of the last 98. The “average” projection climbs uninterrupted while real returns keep stopping to dig out, and over a few decades that difference grows into millions.

I finally published the spreadsheet

Several years ago, being the nerd that I am, I built a spreadsheet to illustrate this.

I’ve shared it on social media a few times, and it always generates a cacophony of comments – some from people who agree, some from people who believe Dave Ramsey would never tell them anything misleading, and some from CFPs who managed to earn that designation but seem incapable of simple math.

Then a recent podcast guest mentioned the power of boring but consistent returns, and this spreadsheet came to mind again. Because while it was meant to show the shortfall Dave’s 12% creates, it also shows the true power of compounding when you earn a consistent return with no down years.

So I put some lipstick on it and published it as a proper investor resource on our site:

Dave Ramsey's 12%, Illustrated

The page includes 98 years of S&P 500 data, a calculator to backtest any timeframe you want, and answers to the most common pushback I’ve received when talking about this.

It shows how $1,000 invested in 1928 at a steady 11.86% (the average Ramsey’s own website cites) would be worth $58.9 million today…but how the market’s actual path only turned it into $11.6 million.

The power of no down years

The same math works in your favor when the down years go away.

A return with no negative years has nothing to recover from – the average and the actual are the same number, and a projection built on it actually comes true.

That's a big part of why I invest in cash-flowing real assets. They're not risk-free and have their own challenges. But when returns come from recurring cash flow rather than paper appreciation, a consistent high-single-digit to low-double-digit return is realistic – and consistency is what lets compounding work its magic.