Have you taken the time to have a hard discussion with your investment adviser about how you should adjust your investment portfolio as you get closer to retirement age? If you have, he or she probably told you that the closer you are to retirement age, the more secure your investments need to be.
You will need to draw regular payments to support your lifestyle. Some investment vehicles, such as stocks, typically have too much volatility to be depended upon as a source that can be regularly drawn upon by retirees. A balanced portfolio usually includes some combination of bonds, stocks, real estate, and cash. The percentage invested in bonds and cash will increase as you approach retirement age. During your retirement years, you will deplete your stock holdings in the years when stocks are doing well and draw from your less volatile investments, like bonds and cash, during more troublesome periods.
Plan for energy inflation
Over the last few months I have done a lot of research on energy costs, and have uncovered a lot of useful information. I have compiled that information into a series of spreadsheets that examine every aspect of the relationship between investments in your future energy consumption and other types of investments. I have also consulted with several investment advisers, including one top money manager at one of the nation’s leading investment firms.
One of the first things I found is that the U.S. Dept. of Commerce has been keeping track, since 1974, of the price that consumers pay for energy. Energy is a separate component of the Consumer Price Index. As we all know, gas prices have gone up, then come back down, then gone up again; lots of volatility, and not much predictability, but over time the result has been an upward spiral.
Electricity rates, on the other hand, seem much more stable. Yet they have risen at almost exactly the same rate over time as gas prices. When these prices are averaged with other energy prices, such as natural gas, heating oil, and propane, the average annual increase has been 6.33%.
Energy prices increase faster than Social Security payouts
By comparison, the Consumer Price Index, used by the government to calculate increases to your Social Security check, has only risen at an annual rate of just under 1.54% during that same period. It is clear just from looking at these two numbers that if you are trying to use your Social Security check to pay for your energy use, you will be falling behind by about 4.8% per year. The average American living in a 2,000-square-foot house is currently paying home energy bills of around $214 per month. In addition to the home energy costs, the average American is also spending a similar amount on gasoline for transportation. At the current rate of energy price inflation (over the last 38 years), this number will double in about twelve years. Yet your Social Security check would only increase by about 18% over the same time period. It is obvious, then, that you will need some other source of funds from which to purchase energy some other portion of your investment portfolio.
On the surface, the solution might seem simple: If you could use the equity in your home to buy your next 30 years worth of energy at today’s prices, you could lock in a rate of around 5% interest on the loan, and receive a return of 6.33% over time. This would allow you to earn a return of 1.33% per year on the bank’s money. The opportunities are actually much better than that, but the mechanism for doing so is much more complicated. To start with, you just don’t have room in your back yard to store that much gasoline, and surely the neighbors would complain about the smell!
Drastically reducing energy demand can be an important hedge
What is required is either an energy upgrade investment in your existing home, or to sell your existing home and purchase one that is truly energy-efficient. I am not just referring to today’s code-minimum home. While today’s homes are indeed much more energy-efficient than homes of just a few years ago, they still are using energy at a rate that could bankrupt you a just few years down the line. A better choice is to upgrade your existing home or buy a below-net-zero-energy home. Does such a thing exist? Yes, it does; my company and others are now building homes that produce enough energy not only to supply themselves, but also to power your electric car. How much does such a house cost, you ask?
That depends on how big or how fancy a home you would like. We are currently building a very simple, 1,915-square-foot house in Seattle, Washington, that looks just like many of the other homes in its neighborhood. The difference is that this house will power itself and the owner’s car for about 8,000 to 9,000 miles per year, using a 10-kW solar electric array on the roof.
The total cost of this house is right around $250,000 (including the solar panels, but not including the land). That is actually just about at the median price for an existing home in that neighborhood. You could say that the net cost of going to way below net-zero, in this case, is zero. That would not really be true.
Trade your granite countertops for a better envelope and solar panels
To get to net-zero and below requires a complicated set of calculations and trade-offs that are very climate-specific. In rough numbers, the solar energy systems for this house cost about $50,000, other envelope upgrades cost about $10,000, and the heating, ventilating and hot water system will cost about $7,000 more than what most new homes would spend. In addition, the owners are willing to forgo a few amenities that most new homes in the neighborhood have, such as granite countertops.
A more accurate estimate would be that it costs about $75,000 more for the below-net-zero-energy house than it would cost for a similar home of standard construction in the same neighborhood. This represents a 40% increase in costs over that of standard construction, if you added back in the amenities that other homes would have. In a more expensive home, that percentage would be much smaller, perhaps as little as 15%.
So, what do you get for your $75,000 investment?
A tax-free income stream
For the purpose of this exploration, we used a 30-year time horizon, because that is the duration of most mortgages in the U.S. today. We compared the return our customers will realize by having no energy bills, to the returns they could receive from a variety of common investment vehicles. To make this a fair comparison, we assumed that you would draw from the initial investment each month to pay your current energy bills.
You would be required to pay income tax on the income from your investments. There is no tax on your energy savings! We were so surprised by what we found, that we ran additional calculations, using actual energy savings from other homes we have built, and savings from some high-performance energy remodels we have completed over the last few years. What we found is that the energy savings in all cases provided a higher rate of return, with a higher level of security, than any other secure type of investment.
Better than traditional ‘stable’ investment options
If you invested in money-market funds or Certificates of Deposit, your energy bills would have eaten up the entire investment within the first ten years. Investments in the bond market would have fared much better, not running out until just over twenty years into the investment period. Investments in the Dow Jones Industrial Average or the S&P 500 Index, with all dividends reinvested, would have netted you a larger return, but with way too much volatility to be worth the risk.
For example, if you had started your investment period about ten or twelve years ago, you would be almost out of money by now, and we have no way to predict that the next ten years would be any better than the last ten, even though the last thirty-five years have been very good. The energy investment, by comparison, will save our customer over $350,000 over the next 30 years!
What this means is that any other investment could end up leaving you having to make some terrible choices in your future, like whether to pay your energy bills, your grocery bills, or your medical bills.
While past performance of any investment cannot predict the performance of future returns, it is clear that having a zero energy bill will always effectively net you a return, and that return will become even more significant over time.
The energy retrofit option
One final note on energy improvements to your existing home: If you have a great house, in a good, central location, nice yard, everything you want, but just too many energy bills, what should you do? This is where a high-performance energy remodel comes in.
We have done high-performance energy remodels that have reduced the over-all energy consumption of existing homes by up to 66% and the heating and cooling energy use by over 83%. These results were before adding any alternative energy production like solar hot water or photovolatic panels. Because the previous energy use of the existing house was way above the national average, the savings experienced by the owners was even greater than those experienced by the purchasers of our new homes.
Every home is different, so it is impossible to predict exactly how much it will cost to achieve what result in an existing home. A qualified Home Energy Rater should be able to help you with these calculations.
My conclusion is that investing in the energy efficiency of your home today could well be the wisest investment you could make to assure a worry-free future.
Ted L. Clifton is a designer, a builder, and the founder of Zero-Energy Plans in Coupeville, Washington.