I have partnered with Energy Ogre in this Energy Ogre review. All opinions are 100% my own. You can use Energy Ogre promo code MSOC to receive a free month of Energy Ogre service (the 13th month free).
Do you want to save money on your electricity bill?
If you live in Texas, then this article is for you!
Unfortunately, many households in Texas overpay for their monthly electricity bill.
But, that doesn’t mean you can’t change that.
There are plenty of ways to save money on electricity, and one of them is to use Energy Ogre.
Energy Ogre saves members $800 to $1,200 each year on average, so people are actually excited to get their electricity bill, instead of dreading it.
Energy Ogre shops the market for their members, and analyzes the available electricity plans from hundreds of providers, then selects the best one based on the member’s energy usage.
If you live in Texas, this is a really easy opportunity to save some extra money.
You can use Energy Ogre promo code MSOC to receive a free month of Energy Ogre service (the 13th month free).
What is Energy Ogre?
Energy Ogre is an electricity management company that monitors the market to make sure their members are on the best value electricity plan for their home. This gives their members access to the most affordable electricity plans.
Energy Ogre has helped thousands of homes, and the average Energy Ogre member saves over 40% on their electricity bills.
Energy Ogre saves you time and money, and I think that’s a no brainer!
They also have a free savings calculator that will tell you immediately how much money you will save, which I highly recommend. Just try it out to see if you can save any money.
You can sign up for Energy Ogre here.
How does Energy Ogre work?
Energy Ogre is super simple!
Once you sign up, they handle finding the best electricity provider for you, so that you can save the most money and have the best electricity plan for your household.
Then, they continually monitor your electricity contract to make sure that you have the lowest rate.
Luckily, in Texas you have the freedom and option to choose your electricity provider. However, many people don’t realize this or they think it’s too much of a hassle to switch. And, many times, most people simply don’t realize how much money that they could be saving each month!
How much is Energy Ogre?
Energy Ogre is a membership service that costs $10 a month, or $120 per year. This fee is separate from your electricity bill.
Even though Energy Ogre costs a little bit of money, you’ll most likely see great savings, as statistically most people are overpaying in Texas!
Remember, Energy Ogre saves members on average $800 to $1200 each year.
Is Energy Ogre legit?
Yes, Energy Ogre is paid for by members like you, instead of electricity companies. Since they are completely independent, you know that YOU are their focus.
Some of the tasks that Energy Ogre does include:
Energy Ogre monitors the electricity market to make sure you are always on the most affordable plan.
They receive custom, below-market rates to save you the most money.
They stay ahead of your renewals so that you are always getting the best pricing.
They provide tools to better manage your electricity consumption.
Yes, you could find your own electricity plan, but using Energy Ogre can save you a ton of time, and they know what they are doing. Energy Ogre reads all of the fine print, knows about all of the surprise fees, and they do all of the calculations for you.
So, you’ll be in good hands with Energy Ogre.
How can I cut my electricity bill?
If you want to cut your electricity costs even more, here are many other ideas that can help you save even more money:
Instead of using your air conditioner, use fans. Fans use a lot less electricity than AC.
Regularly change the filter on your AC or furnace.
Unplugging unused electronics. Computers, TVs, chargers, and more all use power even when they’re turned off.
Changing your heat or air conditioner temperature so that they turn on less often and use less power.
Keeping your refrigerator doors closed, as it uses energy to cool it back down after you are done.
Turning off lights around your home.
Using a programmable thermostat. With a programmable thermostat, you can set the temperature at exactly what you want it to be for different times throughout the day. This way you don’t have to constantly change it as it will automatically change on a set schedule.
And of course, sign up for Energy Ogre!
If you live in Texas, Energy Ogre can help you save hundreds of dollars a year.
You can use Energy Ogre promo code MSOC to receive a free month of Energy Ogre service (the 13th month free).
What do you do to save on your electricity bill each month? How much is your monthly bill usually?
Looking for ways to go green? Check out the Domestic CEO’s 5 easy ways to save electricity (and money) in your home!
December 31, 2020
save water, to cut down on the amount of trash you create in your kitchen as well as some environmentally-friendly laundry tips.
If you’ve ever Googled “How to save electricity,” you’ve found out the hard way that there are hundreds of tips out there. Some of these tips are easy to implement, but some of the ways to save electricity that are suggested online are tips like, “Use candles instead of turning on lights.” While this will certainly save electricity, it’s not incredibly practical. That’s why I decided to put together a list of some of my favorite, easy-to-do tips to help you save electricity.
Tip #1: Save electricity by turning off lights
If your parents were like mine, you probably still have a voice rattling around your head saying, “Turn off the lights!” whenever you exit a room. Our parents had it right, because there’s absolutely no reason to keep a light on in a room you are not in. If you can commit to simply turning off the lights in every room when you leave it, you can save electricity immediately.
Whether you are going to return to the room in 10 minutes or 10 seconds, there’s no reason to have the light on while you’re not in the room.
Tip #2: Save electricity by turning off (and disconnecting!) electronics
Just like there’s no use in keeping lights on while you’re not in a room, there’s no use in keeping electronics on while you’re not using them. When you leave for the day, make sure all your electronics are off. This includes your TV, sound system, computer, and any other electronic gadgets you may have around your home.
Did you know that electronics that are plugged in, and not even turned on, can account for 5-10% of electricity used in a home?
Taking it one step further, did you know that electronics that are plugged in, and not even turned on, can account for 5-10% of electricity used in a home? Computers, printers, coffee makers, and even phone cords that are plugged in can be energy vampires, sucking electricity (and your hard-earned money) when they aren’t in use. So you may want to invest in a power cord that you can plug most electronic devices into. That way, you can simply unplug off just one switch when you leave for the day (instead of walking around unplugging things throughout your home). Yes, it might take 2 more seconds of your time to turn the power cord on than simply turn the electronic device on, but it can make a big impact in your electricity bill.
Tip #3: Save electricity by taking care of your air conditioner
If you live in an area of the world where you use your air conditioner a lot, this can play a major part in your energy consumption. If you want to save electricity, there are a few things that you can do to make sure your air conditioner is running as efficiently as possible.
First, have your air conditioning unit serviced annually. Most companies charge a nominal fee to have this service completed. It involves cleaning out the coils and checking for any small repairs that are making your unit work overtime. Next, make sure you change your air filters monthly. These filters catch a lot of dust and dirt, which starts to clog them. The more clogged the filters, the harder your air conditioning unit has to work to get the air to pass through the filter. If your filters are any color other than white, making a slight whistling sound, or worse yet, are bent because they are being sucked into the vent, change them immediately. This change alone will save a ton of wasted electricity from being used to cool your home.
Tip #4: Save electricity by making easy swaps
A couple of quick swaps in your house can help you save electricity. The first you may want to consider is using ceiling or box fans instead of running your air conditioner as much. Oftentimes, just circulating the air in a room will help the room feel cooler. Instead of running the massive cooling unit outside your home, a fan uses about the same amount of electricity as a light bulb. For every degree you can raise your air conditioner, you save about 5% of the energy being used. I live in the desert of Arizona and my fellow dessert-dwellers are very familiar with this technique. It costs an arm and a leg to cool a house in Arizona to 70 degrees, so most people set their thermostats between 77 and 81 degrees and run the fans to do the rest. It keeps us comfortable, both with the feeling inside our house as well as when we see our electric bills!
Another easy change is to switch incandescent light bulbs to fluorescent, otherwise known as CFL, light bulbs. CFL bulbs use just 25% of the energy of regular light bulbs, so when you combine that with always shutting them off, you can dramatically save on your electricity consumption. Just remember that CFL bulbs contain a small amount of mercury, so they need to be disposed of properly. Check with your local government agency to see how they require these bulbs to be disposed of.
Tip #5: Save electricity by keeping nature outside
The final tip on how to save electricity is to make sure you don’t have any drafts coming into your home. If you hold a feather around the edges of your windows and doors, the feather should be perfectly still. If it wavers, that means outside air is getting into your home. The more outside air that gets into your house, the more your air conditioner or heater has to run. Seal up your windows and doors with weather stripping, which is available at your local hardware store and is relatively easy to apply.
Also, during the summertime, keep the sunshine out of your house using room darkening blinds and curtains. By keeping the sun out, especially from south and west facing windows, you will keep your house from heating up, which will do a big part in helping to save electricity.
These are just a few tips to save electricity to get you started.
If you want to keep utility costs consistent month to month, budget billing may be for you.
Your utility bills likely make up a significant part of your monthly budget, so it’s important to keep a close eye on them. But while your rent or mortgage stays the same month to month, your utilities don’t.
Sweltering summer days and icy winter nights can lead to budget-blowing spikes in your utility bills, and no matter how hard you try to budget and plan, you can’t predict the total each month. Or can you?
Budget billing may offer the consistency you crave. Here, personal finance experts describe how budget billing works and explain who may benefit from it, empowering you to answer this question for yourself: Does budget billing save money?
What is budget billing and how does it work?
As you consider this option, your first question might be: What is budget billing? Budget billing is a service offered by some utility companies that provides a set monthly bill for services like gas or electricity.
How does budget billing work? To calculate your monthly budget billing amount, a utility company will look at your past usage, typically over the last year, and average it to determine your monthly charge, says Sara Rathner, financial author and credit cards expert at NerdWallet. This will give you a predictable bill to pay each month, rather than one that fluctuates.
Keep in mind that if you recently moved into your home, the charges used to calculate your budget billing amount may be based on the previous owners’ or renters’ usage, says Rathner. Your actual usage may end up being more or less than theirs.
Another point to remember on how budget billing works: While budget billing gives you a steady amount to pay each month, this amount can, and likely will, change over time. Some providers update bill amounts quarterly, some annually. There’s no universal timeline for these updates, so be sure to ask your utility provider about its specific process, says Lance Cothern, CPA and founder of personal finance blog Money Manifesto.
These changes are made to capture your actual usage, whether that usage has decreased (a mild summer allowed you to keep the AC off more often) or increased (a brutally cold winter forced you to blast the heat). Typically, you will be notified in advance of the change.
Now that you know how budget billing works, you may be wondering: Could it save me cash?
Does budget billing save money?
“Budget billing won’t save you money; it just evens your bill out over time,” Cothern says.
How does budget billing work if you end up using less energy and overpay? You may be reimbursed for the amount you paid above your actual energy usage, or the amount overpaid will be applied to next year.
How does budget billing work if you underpay? You’ll have to pay the extra amount to make up the difference. These payments or credits happen in addition to any adjustments your provider makes to your monthly bill if your usage changes over time, Cothern says.
What are the benefits of budget billing?
Overall, there’s a fairly straightforward answer to what budget billing is, and the benefits are clear, too. While it doesn’t save you money per se, it may allow you to more easily manage your monthly budget.
For example, if you know your monthly electricity bill will be $100, you can account for this expense in your budget and more precisely allocate funds into other expenses or savings.
“Anyone who sticks to a strict, detailed monthly budget may prefer the predictability of budget billing,” Rathner says. “You know exactly how much your utility bill will be each month and can plan your other spending around it.”
Combine budget billing with autopay and you can set and forget your utility bills, ensuring they’re paid on time and in full, making money management a lot simpler. This could also help you deal with financial stress.
What are the downsides of budget billing?
While budget billing has its pros, it also comes with cons. Does budget billing save you money? To help answer that question, consider the following:
You may face extra fees. Some utility companies charge a fee for budget billing. In Cothern’s view, this negates the benefit since there’s no reason to pay tacked-on fees for this service. It’s important to find out whether there are fees before signing up when you’re researching how budget billing works.
You may ignore your utility usage. Budget billing puts your monthly utility charges, as well as your actual usage, out of sight and out of mind. Without the threat of a higher bill or the reward of a lower one based on your energy habits, some people get complacent, Rathner says. They leave lights on or turn up the heat instead of grabbing a blanket. If this sounds like you, budget billing may actually cost you money in the long run.
“Always keep an eye on your monthly bill even though you pay a level amount for months at a time,” Cothern says. Most utility companies provide your usage information right on your bill.
If you can financially handle the seasonal swings of each bill, budget billing may not be much of a benefit for you, Cothern says. Paying the full amount also means you’re paying attention to the full amount, he says, which may motivate you to reduce your energy consumption. And that’s where the real opportunity to save money lies.
By considering potential fees and the impact on your energy usage, you’ll have a good sense of whether budget billing saves you money in the long run.
Make the most of how budget billing works with this hack
After scrutinizing how budget billing works, the potential downsides have led some financial pros, Cothern among them, to develop a new hack for paying utility bills.
You earned it. Now earn more with it.
Online savings with no minimum balance.
Discover Bank, Member FDIC
Instead of signing up for budget billing, open a savings account online specifically for utilities, Cothern suggests. You’ll also want to sign up for a rewards credit card, if you don’t have one already.
Next, grab your last 12 months of utility bills, total them up and divide by 12 to get your monthly average. You’ll then want to set up an automatic transfer of that amount from your checking account into the utility savings account each month.
When the utility bill comes, pay it with your rewards credit card and then pay that bill with the money in your savings. You reap the benefits of maintaining a consistent amount coming out of your budget, as well as credit card rewards and any interest earned on that money from your savings account.
Do your homework before signing up for budget billing
After weighing your options and considering your personal budgeting style, you may decide that budget billing is right for you.
If that’s the case, it’s important to read your utility’s program rules in detail. Yes, that means digging into the fine print to understand how budget billing works at the specific company, Cothern says, because budget billing is a general term for a wide variety of utility company programs. Budget billing may be called something else, like flat billing or balanced billing, and it may carry different nuances and terms.
Before signing up for budget billing, Rathner suggests calling your provider and asking the following questions:
Are there startup or maintenance fees?
How is the monthly amount calculated? How often is it updated?
What happens if you overpay or underpay?
What happens when you move or end service?
With the answers to these questions, you’ll have a better idea of how budget billing works for your provider. Armed with that info, you can determine whether budget billing saves you money and make the call on whether enrolling is right for you.
Whether you opt for budget billing or not, small adjustments to your home can result in major savings on your energy bills. For starters, check out these four ways to save energy by going green.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
Today we’re going to take a look at the well-known Trinity Study. For those who aren’t familiar, don’t worry. I’m going to start off by explaining what the Trinity Study is, how it was done, and how to use its results. It’s all about saving for retirement and planning for retirement.
But then I’m going to take a look at a few possible visions of the future. We’re going to create an updated Trinity Study that we can use as part of our retirement planning.
I’m also going to introduce an interesting risk-mitigation tactic. It’s called consumption smoothing. Bears do it, trees do it, and it feels like it should work for retirees. But we’ll see why Mother Nature’s tactics fail in retirement planning.
The What: Describing the Original Trinity Study
If you’re already intimately familiar with the Trinity Study, feel free to skip down to the Wade Pfau section. Right now, we’ll introduce the original Trinity Study.
The Trinity Study was a retirement planning study published in February 1998 issue of AAII by three professors at Trinity College, in Texas. They based their work off of William Bengen’s SAFEMAX study (1994).
The goal of the study was to determine a safe withdrawal rate (SWR) for retirement accounts. A withdrawal rate is the “salary” that you pay yourself during retirement, by withdrawing money from your retirement nest egg—investment options like mutual funds, taxable accounts, tax deferred 401k, tax advantaged Roth IRA, annuities, defined benefit pensions etc. (Social security funds are not part of the Trinity Study).
A safe withdrawal rate is a withdrawal rate that allows a retiree to not run out of money by the time they die. SWR can also be thought of as a portfolio success rate. What’s a sustainable withdrawal rate and asset allocation that leads to retirement success?
Running out of money would be bad—not safe for one’s retirement plans. The Trinity Study aimed to provide a reliable SWR such that retirees would know how at-risk they were to run out of funds.
People in the FIRE movement frequently reference the Trinity Study when planning early retirement withdrawals. If you Google “4% Rule” or “retire with 25x your annual spending,” you’ll see what I mean.
Many FIREees directly tie their Savings Rates to the Trinity Study so they can figure out when it’s safe for them to retire.
Study Assumptions, Method, and Outcome
Let’s dig into the specifics of the Trinity Study. It’s got more nuance than most people in the FIRE community are aware of.
The study assumed that most retirees portfolios can be categorized based on their stock and bond allocations. The study looked at portfolio that were 100% stocks + 0% bonds, 75% stocks + 25% bonds, 50/50, 25/75, and 0/100.
This is fair. Most retirees’ portfolios contain a mix of stocks and bonds.
Both in the Trinity Study and Bengen’s original research incorporated long-term, high-grade corporate bonds. Corporate bond returns are typically higher but riskier than government bonds (note: as of January 2021, 10-year treasury bonds are yielding less than 1%. In 1995, they were yielding 7.9%).
The stocks in the portfolios were assumed to be a diverse mix of stocks from developed market countries i.e. a portfolio with returns using historical data. For example, a Vanguard or Fidelity total market index fund.
Summary: the Trinity study examined many mixes of stocks and bonds.
The study also looked at various lengths of retirement. Some people will retire at 50 and live until 90—a 40-year retirement. Other people retire at 65 and live until 80—a 15-year retirement.
A short retirement might succeed even if the retiree withdraws a high percentage of their nest egg every year. A long retirement, on the other hand, might fail even if the retiree withdraws a lower percentage of their nest egg every year.
Different Withdrawal Rates
The study authors varied their withdrawal rate variable from 3% to 10%.
A 3% withdrawal rate is likely to be more successful—you’re spending less money every year, and allowing more of your money to remain in your portfolio to (ideally) grow. But a low withdrawal rate also leads to a more restricted retirement lifestyle.
A 10% withdrawal rate is opulent, but is more likely to fail. An unfortunate side effect of spending more money is that you’ll quickly run out.
The question, then, is “How do we find the highest withdrawal rate possible while not running out of money?”
Heart of the Trinity Study
The real heart of the study—the question being asked and answered—is:
“If a person retired in Year A, stayed retired for B years, and withdrew C% of their portfolio each year, will they run out of money using a D ratio portfolio of stocks and bonds?
The researchers asked this important question for every single combination of
Year A (from 1926 through 1995)
B years of retirement (from 15 to 40, by multiples of 5)
C% of annual withdrawal (from 3% up go 10%)
and D ratio of stocks and bonds
Ostensibly, a retirement that is too long, or suffers through a bad market, or that withdraws too much money each year…that retirement could run out of money. That retirement could fail.
The withdrawal rates are tested using historical data from 1926 to 1995. For example, when B = 30 years, the authors tested all 30-year rolling periods from 1926 to 1995.
The creation of the 4% Rule
While there are many interesting outcomes from the Trinity Study, the main result has been nicknamed the “4% Rule.” The highlights are the 4% Rule are:
If you use a 4% as Year 1 initial withdrawal, and then slowly increase each year to adjust for inflation… (Study input C)
In a 50/50 stock/bond portfolio… (Input D)
For a 30-year retirement… (Input B)
Then you would have been “safe” for 95% of starting years in the study (Input A)
So this would suggest that a retiree with $1 million dollars could reasonably expect to withdraw $40,000 (which is 4% of $1 million) in their first year and afterwards increase for inflation each year**.
This would have allowed that retiree to successfully live a 30-year retirement without running out of money in 95% of the rolling 30-year periods that the study looked at.
**Note: increasing for inflation is the most-often overlooked aspect of the 4% Rule.
“4%” applies to Year 1 of your retirement. Each subsequent year’s withdrawal assumes you’ve adjusted that number up by the rate of inflation.
The Wade Pfau Updated Trinity Study
Wade Pfau is a professor and PhD in Financial Planning. He’s written excellent pieces on the Trinity Study, including an updated Trinity Study using data through the year 2014.
Along with the extended data set, Pfau also changed the type of bond that the study assumed. The original study used corporate bonds, but Pfau thought it was wiser to look at intermediate-term government bonds.
With this change, Pfau’s outcomes actually look more optimistic than the original study. Pfau found a 100% chance of success (instead of 95%) using the same assumptions that created the original 4% Rule. In Pfau’s update, every 30-year retiree still had money using a 50/50 stock/bond portfolio and withdrawing 4% (plus annual inflation) of their retirement savings each year. This is good news!
But Pfau also asks and examines a crucial question in his updated Trinity Study: will the future look like the past?
Will the future look like the past?
To call this a “million dollar question” would be an understatement. It’s a trillion dollar question.
The Trinity Studies are based on historical market data. That data was taken from a period of wild growth. In the past 100 years, our society has taken unprecedented leaps in manufacturing, technology, and information. Is it wise to assume that the future will look like that past? Will growth continue to be as positive? Should we continute to invest at all-time highs?
The contrarian might point out that the Trinity time periods also included the Great Depression, Stagflation in the 70’s, the Dot Com bubble and the 2008 subprime crisis. So, there are some bad times in there too.
Does it make sense to analyze a scenario where everything is wonderful?
What will our retirements look like if the entire world achieves peace and harmony, enough wealth for daily lattes and avocado toast, and nobody wears clothes?
Is that a question worth answering? And why are all utopias also nudist colonies?
No! That’s not a question worth examining! We don’t need to be worried about utopia.
I say “Hope for the best, but plan for the worst?” That’s what we want to do here. We want to plan on things being tough.
We might have to choose lower withdrawal rates. If we’re right, we’ll be very thankful we planned for it. But if we’re wrong and things are great…well, great! If I’m wrong, I’ll accept “things are great” as a consolation prize.
Just be careful—I don’t want some hairy dude too close to my avocado toast.
The Best Interest Updated Trinity Study Simulation
Riffing off of Wade Pfau, I’m unofficially addending to the Trinity Study to look at possible bleak futures.
To create my version of the updated Trinity Study, I ran Monte Carlo simulations.
I created an alternate reality (no nudists), used randomness to determine the nature and volatility of that reality, and then figured out how a retiree would fare in that reality. Then I repeated that random reality a few million times for different market returns, SWRs, etc.
Some assumptions in my analysis:
I looked at average annual market returns varying from 3% to 7%, calculated on a monthly basis. People often cite the S&P 500 having 9%-10% returns. A balanced, lower-risk portfolio might have 6%-7% returns. But remember, we’re looking at worse markets than the past.
Assumed that monthly portfolio returns have a standard deviation of 3%, due to mix of stocks and bonds. This is based off of historical variations from Burton Malkiel’s data sets.
Used a Laplace distribution to determine the “randomness” in the simulation.
Only looked at 30-year retirements, to keep in line with the oft-quoted result from the original Trinity Study (the 4 percent rule is based on 30-year retirement).
Chose various withdrawal rates using the original study as a guide
Assumed our investor only withdraws their money once per year. E.g. they withdraw $40K on January 1st, and live off that $40K until the following January 1st, etc.
Assumed an annual 3% inflation to calculate the inflation-adjusted withdrawal rate
(For second analysis only) Assumed a 0.5% return on cash (e.g. a high yield savings account).
Keep in mind, this took me a few hours to set up and get results. The actual Trinity authors are career academics and ran their studies like professionals.
I admit than my assumptions and methodology are not as rigorous as theirs. But I think we can glean some insightful information nonetheless.
A lot of people felt that my original analysis was too pessimistic. So pessimistic, in fact, that it lost integrity. That it’s worse than the worst-case scenario.
So, I want to emphasize: I’m only asking What if? there’s a terrible, bleak future.
How might someone conservatively alter their retirement goals? How might someone’s current savings plan and savings rate be affected? Is it worth re-checking the retirement calculator?
I, like you, hope the future is as good or better than the past. So I don’t want anyone to start stockpiling precious metals because of my fictional simulation.
In the post-coronavirus investing world of zero percent interest rates, is it so crazy to think that the next few decades might behave differently than the past?
Below is the summary table of results from my random simulations.
The SWR varies by column, and the average annual return varies by row.
The actual entries in the table are the percentage of simulations that created a successful retirement based on a particular combination of SWR and market return.
What sticks out? Where do we start?
To me, I immediately take a look at the 4% SWR column, because that’s what the Trinity Study has convinced us is safe.
If the Market Stagnates Long-term, Then the 4% Rule is in Trouble.
Thankfully, Microsoft Excel has some cool color schemes to help us with the visualization.
If traditional 50/50 portfolios underperform compared to historical precedent, then the 4% rule is in trouble. This isn’t shocking.
If we want to achieve the “security” that the tradition 4% Rule provides, we have to look for a ~95% chance of success. Moving to a 3% or 3.5% Rule immediately provides that safety margin (even in some terrible markets). But, of course, moving to a lower withdrawal rate means that we have to save more money in order to maintain the same standard of living.
A few question, though, immediately arise.
First, what are the good reasons to expect this underperformance? Have we ever seen a period perform this poorly?
And second, can we do anything about it?
On the first question: yes, we have seen 50/50 portfolios perform as poorly as 6.17% per year for a full 30-year period.
With government bond rates at historic lows and the stock market at historic highs, there are legitimate concerns over future returns. The optmistic news: average 50/50 portfolio performance is 8.6% per year.
Can we do anything about it?
One idea that neither the original Trinity Study nor Pfau’s update looked at was the idea of consumption smoothing. In brief, consumption smoothing means “do more when times are good, do less when times are bad.”
To explain more, let’s think about a tree.
Here in chilly Rochester, NY (and other non-equatorial climes) trees only have leaves during the late spring, summer, and early autumn. During the long summer days, the trees absorb as much solar energy as they can.
But during the winter months, days get short. It doesn’t make sense for the tree to maintain its leaves—which consume resources—for such a short day. Therefore, the tree drops its leaves in the autumn and survives off the previous summer’s gathered energy.
Put another way: the tree uses surplus energy gathered during the bountiful summer in order to survive the harsh winter.
For our purposes, consumption smoothing means “withdraw more money when the market is up, and withdraw less when the market is down.”
You know that phrase Buy low, Sell high? Well, consumption smoothing helps you emphasize the Sell high part by withdrawing more money when the market is high. It also prevents you from Selling Low too much, by withdrawing less when the markets are down. You use your extra Sell High money to “smooth out” the bad years that may come later.
Simulation with Consumption Smoothing
So I ran the simulation again, this time using a consumption smoothing algorithm. What did this algorithm look like?
In short, I created a “Cash Reserve” in the simulation, which started at $0. After each year that the market went up, I would pull that both that year’s withdrawal (the SWR amount) and extra money to go into the Cash Reserve. But if the market went down, I used a combination of the previous years’ Cash Reserve and retirement withdrawal to fulfill that year’s spending need.
It’s just like my tree. During good years, we’re the tree in summer. We’re withdrawing money for this year, and money for a time when we’ll need it in the future. During bad years, we’re the tree in winter. We]re borrowing from the good years’ reserve before tapping into our retirement account.
Consumption Smoothing Results
The results might surprise you. It feels like we’re being cautious. We’re “gettin’ while the gettin’ is good.” But what works for bears and trees does not work for retirees.
This is the same exact simulation as before, except with consumption smoothing turned on. Our portfolio failure rate increases slightly across the board. But why?!
The answer is simple: pulling out extra cash—even during “high” markets—will stifle your long-term portfolio growth. Money left alone in your portfolio will continue to grow. Money that you pull out will cease to grow. Consumption smoothing stifles long-term growth.
Remember John Bogle’s advice:
Don’t do something. Just stand there.
Living beings are trained for action. Trees need to gather sunlight. Humans reward hard work. A bear who doesn’t prepare for winter will surely starve.
But John Bogle succinctly pointed out that markets work in the opposite manner. Interfering with your portfolio doesn’t help. It hurts.
Parting Thoughts about the Updated Trinity Study
At the end of the day, we don’t know what the future will look like. Today, I chose what most people would consider an overly pessimistic view. It can be scary, but as the Roman civium used to say, “praemonitus, praemunitus.” Forewarned is forearmed.
I’m not suggesting that a 2% SWR is needed. I don’t think it’s the only way forward. But I do think it’s worth the mental exercise. How prepared will you be for a pessimistic future?
There are many personal finance ideas that work this way. You can educate yourself on the objective possibilities, but the final decision really comes down to your subjective feelings about risk.
I hope today’s post brought you a new perspective, and provides you with some objective possibilities so that you can make your best financial decisions.
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