Stop the Madness: How Financial Guru Math Could Wipe Out Your TSP
Updated: Nov 3
There seems to be some bad math going around, and I've heard it repeated in person more than once over the last few weeks, so I figured it's worth talking about.
One question that seems to come up repeatedly is, “How much can I spend from my TSP each year once I retire?” Unfortunately, there isn’t a standard answer. There are multiple variables that go into this decision.
What I do know for sure is that the math does NOT work this way:
Fact 1: The U.S. stock market has historically averaged 10–12% annually over the long run.
Fact 2: Inflation averages 3 - 4% annually (depending on the timeframe you look at and whether you're measuring by Consumer Price Index (CPI) vs. Personal Consumption Expenditures(PCE)).
Conclusion: Therefore, you can safely withdraw 7-8% of your investment portfolio each year, adjusting that dollar amount for inflation annually, without worrying about running out of money.
Bottom line – this math doesn’t math.
Dave Ramsey
I’m a Dave Ramsey fan...for the vast majority of things that he and his team teach. I also appreciate his no-nonsense approach. Some quotable quotes from Dave:
“Right after I get desperate, I get stupid. And right after I get stupid, I get broke.”
“Doing dumb things doesn't always mean you're a dumb person.”
Dave has helped millions of people get out of debt and learn the basics of saving and investing. There’s no arguing that this is desperately needed during a time when according to the 2025 Survey of Household Economics and Decision Making, 45% of Americans lack enough emergency savings to cover three months of expenses.
Where I Respectfully Disagree
Dave has frequently talked about a 7-8% safe withdrawal rate for spending in retirement (adjusted for inflation). In fact, he recently called retirement experts who suggest a lower safe withdrawal rate, “super nerds” who “live in their mother's basement.”
I can assure you that I am in fact a super nerd, but I do not live in my mother’s basement.
Here’s what Dave has said on retirement withdrawals:
“If you'd rather live on $80,000 a year at retirement, you'd need $1 million. If inflation runs about 3 or 4 percent, and you're making 11 to 12 percent, you can pull out 8 percent, and you're still leaving enough in there to give yourself an inflation raise every year and not touch your nest egg” (full article here).
Here’s an excerpt from a recent podcast/YouTube episode:
“I hope we didn't put out trash like that 4-5%...I mean if you're making 12% in good mutual funds and the S&P has averaged 11.8% and if inflation for the last 80 years has averaged 4%, if you make 12% and you need to leave 4% in there for inflation raises that leaves you 8, so I'm perfectly comfortable drawing 8 but if you want to be a little bit conservative 7 but sure not 3 or 5.” “Stay away from 4% withdrawal rate morons.”
I have two main issues with these statements:
(1) Averages
(2) Sequence of returns risk
Let's dive into both of these.
S&P 500 Average Historical Returns
The below S&P 500 data is from the NYU Stern School of Business:
The Highs
1928 – 2025 (98 years – since inception): 11.86% arithmetic mean / 10.02% geometric mean
1975 – 2025 (most recent 51 years): 13.64% arithmetic mean / 12.37% geometric mean
2000 – 2025 (most recent 26 years): 9.58% arithmetic mean / 8.00% geometric mean
2015 – 2025 (most recent 11 years): 14.45% arithmetic mean / 13.41% geometric mean
Best 25-year period: 1975 – 1999: 17.86% arithmetic mean / 17.11% geometric mean
Best 10-year period: 1949 – 1958: 21.56% arithmetic mean / 20.11% geometric mean
Best 5-year period: 1995 – 1999: 28.44% arithmetic mean / 28.30% geometric mean
The Lows
1929 – 1979 (51-year period): 9.83% arithmetic mean / 7.60% geometric mean
1956 – 1981 (26-year period): 9.27% arithmetic mean / 7.94% geometric mean
2000 – 2015 (16-year period): 5.71% arithmetic mean / 4.02% geometric mean
Worst 25-year period: 1929 – 1953: 8.09% arithmetic mean / 5.22% geometric mean
Worst 10-year period: 1999 – 2008: 0.65% arithmetic mean / -1.36% geometric mean
Worst 5-year period: 1928 – 1932: -8.42% arithmetic mean / -12.71% geometric mean
The average returns (especially for those who invest for the long run) are largely positive.
Over 98 calendar years, the S&P 500 had a positive return approximately 73% of the time.
There wasn’t a single 16-year rolling period that resulted in a negative return. Moreover, 97.8% of 8-year rolling periods resulted in positive returns. However, there was also an 8-year period that resulted in a -28.7% cumulative return (1930-1937). This rolling return data should strongly reinforce the critical importance of staying invested and that, “time in the market beats timing the market.”
Averages: Arithmetic vs. Geometric (a.k.a. CAGR/Compound Annual Growth Rate)
At first glance, this might seem like just a “super nerd” distinction, but it matters, especially when thinking about investment returns.
Let’s use this very basic example:
1: You start with $100
2: You earn a 100% return
3: You now have $200
4: You then experience a -50% loss
5: You are right back at $100.
What’s your return on that initial $100 investment?
$0, or 0% return. This makes sense. Start with $100, end with $100, you didn't gain anything.
However, what is your average return, in terms of how most people calculate averages? Back to middle school basics...add both numbers together and then divide by 2. But wait, (100 – 50) / 2 = 25. Did you experience a 25% return if you started with $100 and ended with $100? Absolutely not.
That’s why the arithmetic average isn’t the best when looking at investments returns. The arithmetic average isn't wrong or intentionally misleading. It simply measures something different. It's useful for estimating expected returns over a single period, but it doesn't accurately represent compounded investment growth over multiple periods.
The geometric average is a more appropriate measurement because it accounts for compounding and the effects of volatility, making it a more appropriate measurement for historical performance.
Yes, this is an extreme example. And rarely are we dealing with 100% one year and -50% the next year, but it helps easily illustrate the importance of knowing which average you’re dealing with.
The illustration below shows a more realistic example using hypothetical investment returns that reflect stock market-like volatility.
Both Portfolio 1 and Portfolio 2 have an arithmetic average annual return of 6%. However, Portfolio 2 ends up with $11,062 less than Portfolio 1.
Why? Because while Portfolio 2 has an arithmetic average return of 6%, its geometric average return is only 4.576%, due to the effects of volatility and compounding.
It's important to understand that the order of returns in Portfolio 2 does not change the ending balance. Whether the positive returns come first or the negative returns come first, the ending balance will be identical, assuming no additional contributions or withdrawals. This is an important distinction.
However, as we'll see next, once you start withdrawing money from your portfolio, the order of returns becomes extremely important.
Sequence of Returns Risk (SORR)
It’s imperative that investors, especially retirees, understand the importance of the sequence of returns. The years immediately before and immediately after retirement can set the tone for the following decades. Market losses right out of the gate while withdrawing from the portfolio can significantly impact how much you can safely withdraw throughout retirement.
Inflation is another big factor that cannot be overlooked.
Let’s go back to Dave’s example of withdrawing $80,000 from a $1 million portfolio (8% withdrawal rate). One portfolio has negative returns first while the other has positive returns first. Over a 10-year period, both retirees experience the exact same investment returns, averaging 12% per year.
Take a look at the two portfolios illustrated below.
Portfolio 1 ends with $267,857.
Portfolio 2 ends $899,504.
They both earned 12% average returns over 10-years.
The order of those returns created a $631,647 difference.
A 12% arithmetic average return does not tell us whether an 8% withdrawal rate is sustainable. In fact, the portfolio with negative returns first experienced positive returns every single year after year 3, including large returns of 20%, 25%, 35%, and 40% in the final four years. Yet the portfolio continued shrinking because the withdrawals consumed so much of the remaining portfolio after those initial bad years.
That's the problem with the logic of, “12% returns minus 4% inflation equals 8% withdrawals”. It treats average returns (arithmetic) as though they arrive consistently every year, ignoring both volatility and sequence of returns risk. Even worse, this example doesn't even increase withdrawals for inflation like Dave has suggested.
And for anyone who thinks returns of -10%, -13%, and -24% in a row are unrealistic, take a look at 2000, 2001, and 2002.
Speaking of 2000...what if a retiree had 100% U.S. stock portfolio and withdrew 8% ($80,000) per year (not adjusted for inflation) on January 1st of each year after retiring 12/31/1999? By 12/31/11, the portfolio balance is $0.
What if the withdrawal rate was 6% ($60,000), not adjusted for inflation? By 12/31/19, the portfolio balance is $0. Not as bad at the 8% scenario, but still, only about 20-years of sustained spending, and that didn’t even include inflation adjustments.
What if the withdrawal rate was 5% ($50,000), not adjusted for inflation? This portfolio would still have a positive balance as of 9/30/2026. However, it’s important to note that $50,000 in 2026 has the same purchasing power as roughly $25,554 in the year 2000. To maintain the purchasing power of $50,000 from 2000, you would need approximately $97,834 in 2026, based on cumulative inflation as measured by the Consumer Price Index (CPI-U).
So, what if the retiree did want to withdraw $50,000 (5%) starting in 2000 but also chose to adjust their withdrawals for inflation annually? By 12/31/18, the portfolio balance is $0.
Now to be fair, three points regarding the portfolio visualizer charts above:
(1) Retiring at the beginning of 2000 represents a particularly unfavorable historical starting point. This could easily be seen as cherry picking data, but it doesn’t change the reality for those who actually retired and experienced a negative market environment.
These examples aren't intended to suggest that every retiree withdrawing 5–8% will run out of money. In fact, there are periods in history where a higher withdrawal rate (10%+ according to Wade Pfau) would be perfectly sustainable. What I’m trying to show is why historical average returns cannot guarantee a sustainable withdrawal rate.
(2) I think/hope most people would make adjustments as the market experienced significant downturns. Studies have shown that retirement spending is variable, not simply adjusted upwards for inflation indefinitely. The above illustrations should further highlight that a fixed constant withdrawal rate is more of a theoretical exercise than a practical retirement spending approach.
(3) We are only looking at a 100% U.S. stock portfolio. I would venture to say that most retirees entering the decumulation stage, don't have 100% of their assets in U.S. equities. This doesn’t account for international stocks (which would have really helped during the first decade of the 2000s), bonds, or cash. Diversification doesn't eliminate risk, but it certainly can mitigate it. A 100% stock portfolio combined with an inflexible, high withdrawal rate introduces substantial sequence risk.
Key Takeaways
I am far from a doom-and-gloom, "permabear", the-sky-is-always-falling type of person. I strongly believe that stock market investing is one of the surest paths to building long-term wealth for the average investor. For those willing to stay invested and avoid reacting emotionally to market fluctuations, I think maintaining a balanced portfolio consisting of stocks, bonds, and cash is a perfectly reasonable approach to spending in retirement. I am by now means suggesting that stocks are too risky for retirement spending. In fact, I personally believe inflation will be a bigger portfolio killer than stock market volatility in the years to come.
On the other hand, I think we need to be realistic, appropriately cautious, and prepared. Do I think a 100% stock portfolio with an 8% withdrawal rate is appropriate? Maybe. Maybe not. Do I think the “4% rule” is a good approach? Maybe. Maybe not. Like I said at the top, there are a lot of variables that go into choosing the appropriate asset allocation, withdrawal rate, and distribution strategy. There is no “one-size-fits-all” approach.
I also think it’s important to disclose that I do not charge clients based on Assets Under Management (AUM). As an advice-only financial planner, I charge a flat fee regardless of how much money someone has invested. In other words, I have no financial incentive to tell people to spend less or preserve a larger investment portfolio. Their account balance has no effect on my fee.
I genuinely want people to enjoy their retirement and spend the money they worked so hard to accumulate, especially when their minds and bodies allow them to do so. This might mean a higher withdrawal rate earlier in retirement before turning on Social Security or other guaranteed income sources. I have encouraged more clients to increase their initial spending than I have cautioned to spend less.
My point is this: A safe withdrawal rate is not simply, “investment return − inflation = sustainable withdrawal rate.” It just doesn’t work that way.
The most reasonable approach is to develop a plan based on the unique variables in your financial life, including your time horizon, family dynamics, risk capacity, risk tolerance, composure, preferences, asset allocation, taxes, legacy goals, gifting strategy, other assets outside your investment portfolio, and more.
I'm still a fan of Dave. But please, don't take blanket advice from anyone when it comes to determining your retirement distribution plan.
About the Author
Tyler Weerden is a fee-only financial planner, Enrolled Agent, and the owner of Layered Financial, a Registered Investment Advisory firm based in Arlington, Virginia. In addition to being a financial planner, Tyler is a full-time federal agent. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE). Tyler is the sole Investment Adviser Representative at Layered Financial.
Prior to becoming a federal agent, Tyler served as a state trooper, local police officer, and was a member of the U.S. Army National Guard. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs), and various investment options to include rental real estate.
Disclaimer
Layered Financial is a Registered Investment Adviser registered with the Commonwealth of Virginia, the State of Texas, and the State of Connecticut. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Nothing in this article should be seen as a recommendation or advertisement. Layered Financial and its Investment Advisor Representatives have no third-party affiliations and do not receive any commissions, fees, direct compensation, indirect compensation, or any benefit from any outside individuals or companies. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments, types of investments, products, or companies are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment, solicit the business, or use that product. The author of this publication may hold positions in investments or types of investments mentioned in articles. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.
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