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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.
Value of Energy Investment over time.xlsx
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23 Comments
Excellent piece, Ted
Keep 'em coming!
Some Deep Energy Retrofits are Bad Investments
So a home energy efficiency upgrader needs to know where to stop before he gets upside down on his investment.
The July 2011 edition has a detailed analysis of a home upgrade that may never pay back:
http://www.jlconline.com/cgi-bin/jlconline.storefront/4e2fc5660428f9a127170a323cb40673/Product/View/1107aner
The $80,000 spent could only be justified by saying the home is now "more comfortable" and that the owner intends to stay for many more years. But what if she had to sell quickly? Well, the upgrades probably only added $40,000 to the selling price of the home, so she loses $40k.
It's definitely an aspect of the investment to consider before jumping in, since the average American historically sells her home after 7 years.
The right spreadsheet will help you get it right
We developed a spreadsheet a couple of years ago that allows you to compare the initial cost and monthly payments to the inflation on energy costs to determine exactly where the break-even point is on any given energy remodel. We use that tool to compare up to three (though you could expand it as much as you like) different remodel options, call it a good, better, best approach. If the homeowner is planning on being in the home for a longer period of time, the "best" option almost always is most cost-effective. Short term, one of the simpler plans may make more sense. These are done without factoring in the increased selling price of the home, because selling price is very subjective. As we have all seen, unforeseen changes in the market can have more to do with selling price than what something is really worth.
The main reason I wrote the article above is to increase public awareness of the value of energy efficient construction. Once the general public understands the information disseminated above, the perceived value, and therefor the resale value of homes that have been properly retrofitted will increase. That doesn't mean you can't make a mistake in going too far to make good dollars and sense, just that if you do the math, and get it right, it will pay off in the long run, God and the Economy willing.
taxes and future value
Never mind resale, if as the result of an extensive DER your house is now much more valuable, you'll pay more in taxes. This can be a signifcant factor in the return on investment. Just like you don't (or shouldn't) buy a house hoping to make money on it some day, don't do an extensive DER or move into a more energy efficient house just to have more cash in your pocket--do it for energy conservation reasons. Will a low-operating cost house appear more attractive to buyers in the future? Probably, especially as energy prices continue to rise. But as with all houses, the energy-efficient house will age and need work and with so many retrofit options being questioned now (I'm looking at you spray foam), who knows what better solution will be available in the future. Today's fixes may be perceived as sensible and valuable, but in the future they could be a liability. Homes are not good investments, in general.
Homes not a good investment?
Whoa, Steven, where have you been all your life? Homes are the greatest source of personal wealth in America. You need to compare the cost of owning and maintaining a home with the cost of renting a SIMILAR home, because you still need a place to live. As with all investments, there are good years and bad years, prices go up, they go down, but on average, the value of homes has risen steadily. Don't be swayed by the last three years of negative numbers on housing prices.
One of the key elements of a good energy remodel needs to be attention to durability, such as replacing older dilapidated wood siding with more durable fiber-cement siding and trim. A combination of air-sealing and adding proper ventilation will also increase the durability of the home.
It takes four days of classes to teach all this, so I can't get it all in one short blog, but it sounds like you need to get some schooling!
I repeat: homes are not a good investment
After adjusting for inflation, homes are not a good investment. You could look at the past few bubble years and think otherwise, but how's that working out for everyone now?
Property taxes, mortgage interest and property upkeep are the "rent" payments you make for owning a house. it's money that is unavailable to other better-yielding investment opportunities. And you'll notice that two of those payments don't go away after you've paid off the loan.
Of course you need a place to live, so you make the choice--rent or buy. Both have advantages and disadvantages. There are many factors involved in that decision and those factors may have different weights depending on the stage of one's life, their lifestyle, etc.
But don't just say owning a house will make you rich. That's what got us into this economic mess to begin with. Not sure i'm the one who needs to get some schooling....
But to get back to the topic of renovations-- I don't need four days of classes to know that there are more durable building materials out there and better bullding techniques than there were 30, 20 or even 10 years ago. But those better materials and techniques come at a premium; there will be better things that come along in the future and dropping $100k today to cut energy bills by 1/2 or 1/3 may not really make financial sense in many situations, especially in the short term.
Just my opinion--someone who's in the process of getting quotes for a DER and just not seeing the numbers add up.
Response to Steven O'Neil
Steven,
I agree with you.
Let's say that you are now spending $2,000 a year on energy for your home -- about the national average. If you want to invest in a deep-energy retrofit that cuts your energy bills in half, and if you are willing to accept a simple payback of 12 years -- much longer than the typical maximum payback period of 7 years -- you are aiming to save $1,000 a year. Over 12 years, that's $12,000 in savings. So that's your retrofit budget -- just $12,000. Trust me -- you can't do much for $12,000.
I know that this is a simplified analysis that doesn't take energy price increases into account, but even with energy price increases, these retrofit jobs are a stretch.
For most of the deep energy retrofits I've reported on, the math doesn't pencil out.
Basic energy upgrades
There are some very basic efficiency upgrades that are cost effective. In the Twin Cities there are many 10 SEER or less AC units churning away out there this summer, I checked the meter on one house and they were using 80 kWh daily during the recent hot spell, ridiculous.
Exposed and uninsulated foundations are another very cost effective energy upgrade. You have to do the math for each proposed improvement. I would look for a simple payback of no more than 7 to 10 years.
on investment
Since 1926, stock equities have grown at an average rate of just over 8% (to date). In the same time period, houses have appreciated at a rate of 6%, less in some areas.
In addition, the building itself is considered a "depreciating" equity -- it needs maintenance, upgrades, and DERs perhaps. It is the land which has appreciated.
I get the point: that there is money to be "returned" from energy upgrades. But I think an actual ROI profile needs to await the (presumed) escalation of the cost of public power supplies. It's a certainty for us. But just like the debt reduction drama playing out in DC, for most people (and policy decisions) the inevitable can be postponed to a future date when it can no longer be ignored.
This is not "simple math"
There are two different and separate issues being discussed in reaction to my blog. Let's get rid of the one that really doesn't belong here first:
First, for the purpose of my essay, it doesn't matter whether or not owning a home is a good investment. A careful look at the history of energy price increases, considering world population, industrialization, and the depletion of known fossil fuel reserves over time will tell us that the historical average annual increases in energy costs will persist. Investing in the energy efficiency of your home is not about making money on the sale of you home. Get that out of your mind. It is about limiting the amount of money you will have to spend in the future, if you do not make these changes. Frankly, the very worst thing that could happen, if we all made these investments, is that the price of energy would not go up at all. Gee, wouldn't that be too bad!
Second is the argument given by Doug McEvers above; that not every energy upgrade is cost prohibitive. Just like any investment, including stocks, bonds, and money markets, not every one is going to perform the same. An investment in one stock might out-perform another, even though they both go up. Another stock might decline in value, over the same period of time. You need to measure the home carefully, to determine the correct investment to make in the home. Fill up the biggest, and easiest holes in the bucket first, then continue with the smaller holes, until the work is no longer cost effective. There is an old axiom in money management: "If you don't measure it, you can't manage it". By extension, if you don't do the measurement correctly, you will be likely to make some big mistakes.
Finally, you meed to do the correct math, and it doesn't show from any of your comments that any of you have done that. The downloadable spreadsheet near the beginning of the article only shows just a glimpse of the work I have done on this, there are several others that have combined to give the full scope of information for this article. The effects of having to pay taxes on the income needed to pay your energy bill, versus the tax-free effect of energy savings, cannot be under estimated. Furthermore, you need to apply the principle of compounding to all of your estimates of future value. "Simple math" has no place in meaningful financial calculation.
Why buying beats renting for energy saving retiree
What never, ever gets factored into the rent vs own equation is the season of life. Let's say renting is better than buying. Yet truth is my income generating years will be behind me when I'm 70. At that point I need a low burn. That low burn comes from a paid off home and an energy efficient utility bill. Now you can make the argument that the retiree should have saved well and had the annuity to pay for retirement rent. But reality says life is busy, we live to the edge of our means, and so simple plans are the plans most easily kept. Pay off your home. Don't move 50 times. The result is a retirement absent rent, and if your home has been a labor of love, you have a low utility burn after 30 years as well.
Bull Dozer Upgrade
How can I know whether it would be more financially efficient to do a bull dozer upgrade (remove the current structure and start over from scratch) rather than a 'deep energy' upgrade?
We are renting (wifes employer provided), and in the next few years (7 if things go well) will be moving anyway. At that point we will purchase a retirement home. The real question is do we 'build new' or buy used and 'retrofit', or do a bull dozer upgrade (buy old house for location and build what we would like).
Decisions can be daunting.
This is a good one
This is a good one, I appreciate seeing all the spreadsheets. A nit and a question. Nit: According to your money-saving scenario, I'll have to trade in my gas-powered car, and the electric car costs more. That needs to be figured in, with cost taken out of "energy savings." Also, if you're putting me into an electric car, you need to show the gas-powered car alternative at the comparable size. All the electrics are the size of a roller skate. A gas-powered roller skate can get me 40mpg today - so I think it's fair you make that adjustment to the spreadsheet to be fair - this will recalculate your payback quite a bit, I think. Question: So how do I cut my energy use to nearly zero in my 1951 ranch house in the Northeast for $75,000?
Response to Pam
Pam,
Good question.
When Jane Bindley renovated her old ranch house to make it net-zero, it cost her $1,190,000. Here's the link: A Leaky Old House Becomes a Net-Zero Showcase.
Net Zero bank account
In 2005 we spent 11k for a new 95% furnace and a 16 SEER AC and insulation for the attic and basement walls with some air sealing thrown in. Our annual utility bill went from about $1,800.00 to $1,200.00, this upgrade barely pencils out. Spending 100k to save $1,200 to get to net zero makes no economic sense. There is also the matter of equipment life expectancy.
The Environment
What none of these assessments take into account is the environment (mainly GHG emmissions) nor the usage of non-renewable reosurces. Unfortunately, there is no metric or means of calculating and/or taking into account these two critical factors. This is a common problem with the way we think.
My high performance home cost me a small fortune. I'm not sure I can recoup what I spent should I choose to sell it. But at least I know I am spewing less GHG's into the atmosphere and my ecological footprint will be greatly reduced over it's lifespan.
A few more birds might be flying around 20 years from now as a result. How do we "account" for that?
Have you been doing it wrong?
I cannot account for how others have thrown away ungodly amounts of money doing unprofitable energy upgrades. What i can account for is how my own company does energy upgrades. What we do is repeatable, on virtually any home built between the end of WW2 and the mid-1980s, when we started going to 2x6 construction and R-19 insulation in the walls, with vinyl windows. In these newer homes, it is just too hard to get a good return on anything other than air-sealing and more attic insulation.
On the older homes, by using insul-lam panels on the outside walls and possibly on the roof, adding insulation under the floor, or converting to a closed crawl-space design, changing to vinyl triple-pane windows, and converting the HVAC system to a ductless mini-split, we can reduce the heating and cooling energy use of the house by over 75%. This can be done for a total bill of between $40,000 and $60,000, depending on the size and complexity of the house. These numbers do not include the cost of doing the cosmetic work that would be done in conjunction with most of these jobs. Maintenance is maintenance, the energy work needs to be priced separately.
In the case of one of our recently completed projects, the owners will be over $300,000.00 richer for having done this work, once their mortgage is paid off. It is a no-brainer, if you design the job correctly, and do the math correctly.
Regarding the electric car...
OK, I must admit, I am not making an apples-to-apples comparison when comparing the average 20 mpg car on the road today to the current variety of electric cars available. But lets look at a few facts:
Many people are driving themselves back and forth from the office every day in a pickup truck. There is less passenger room in the pickup than in the Nissan Leaf, or Chevy Volt. They have no use for the pickup on a daily basis. They probably are getting far less than 20 mpg from their pickup, maybe only 10 mpg. Part of my point is that we do need to be looking at how we are doing things, and revise our thinking. Part of becoming energy efficient in your life does require changing your habits.
Don't discard the pickup, you may still need it occasionally. If it is garaged, and used infrequently, it will last you for a long, long time. The same goes for the family MEGA SUV. Use it when you need it, but not for a one-person commute, or a casual trip to the grocery store.
Now for some specifics on electric car ownership. There is no resale data on electric cars, so I won't even enter that into the conversation. Maintenance on electric cars is much lower than maintenance on a gasoline or diesel powered car, until it is time to change the battery. There are no oil changes, filter changes, air-cleaner changes, transmission maintenance, etc. I saw a recent comparison showing that the annual cost of ownership of an electric car, even including the cost of battery replacement, was much less than the cost of ownership of a gas-powered car.
One assumption I am making is that everyone needs a new car, if not this year, then a few years down the line. If you plan for the conversion to electric when you build or renovate your house, you will have that option when the time comes to choose your next car. If you do not plan, you are doomed to repeat the mistakes of our past.
The spreadsheets - make 'em bulletproof
@Ted, I think your whole thesis is very intriguing -- including making the important point about tax savings that need to be figured in when you avert having to pay for energy out-of-pocket after-tax. However, I think you can further improve your spreadsheets by making the electric-to-gas car issue apples-to-apples as best you can. I think there's a good amount of such data out there. $/mile traveled or some such. It will make your argument more bulletproof -- and moreover, more compelling. In addition, what if the electricity-saving homeowner sells their SRECs? Can't that be revenue added to that side of the equation? Or oops, is that heresy here to sell your SRECs? Finally -- can we see more detail or get a link to the house you're building for $250K that gets to net zero and generates even more for the Prius? Many thanks!
duh
I'm on your site right now, Ted - can see all the plans there. Thanks!
More good advice on the subject
The following comments are from my good friend, experienced green builder, and energy rater, Daimon Doyle of Viridian Northwest. He made these comments in reaction to a newsletter from John Burns Real Estate Consulting, dated this morning, regarding the effects of a rise in interest rates on the cost of home ownership. I think Daimon's comments are perfectly germane to the point I am making above:
"To those whom I think “get it”,
I couldn’t help but share the email newsletter below. The author is saying the exact same thing I have been saying but from another perspective, albeit equally as sound. WE HAVE TO GET CONSUMERS TO QUIT FIXATING ON PRICE! It’s cost of ownership, stupid!
While the author brings up a great argument on interest rates, in my equation if you can reduce your monthly utility bill by just $50, at 4.5% interest that is equivalent to an additional $10,000 in buying power! In other words, a $200K home with a $200/month utility bill cost you same amount of money each month as a $210K home with a $150 utility bill. $10,000 can go a heck of a long way in reducing energy consumption. If the author is correct and the media is to blame for folks taking their eye off of the ball, I feel like standing on every street corner yelling “HEADS!” – people are sooner or later going to get hit with a whopping utility bill.
Folks (talking to my builder colleagues here) if we keep selling based on price and square footage then we are going to continue to get the crap beat out of us. Selling at cost less 10% - make it up in volume - doesn’t work!
We MUST shift the thinking away from cost of purchase to cost of ownership. By the way, the utility scenario above assumes that utility prices are static when in reality we know that for the last 40 years they rise on average more than 6% per year. So while interest rates are certainly a strong reason to BUY NOW, energy efficiency is an even stronger reason to BUY NEW & ENERGY EFFICIENT RIGHT NOW.
How about you – convinced yet?
Daimon Doyle
Viridian Northwest"
Get it?
To Measure and Manage?
Ted Clifton reminds us that "If you don't measure it, you can't manage it".
But the only useful comment came from Steve Dearlove, who said "What none of these assessments take into account is the environment..This is a common problem with the way we think…A few more birds might be flying around 20 years from now as a result. How do we "account" for that?"
We don't account for the environment because (at least until very recently) we don't quantify its value nor commodify the price of destroying it. These, to an economist, are considered "externalities" and irrelevant to cost accounting.
Yes, there is something terribly wrong with the way we think – or, in other words, with the cultural paradigm in which such comparative investment schemes are even considered rational.
The issue is not whether a home is a "good" or "bad" investment, but whether a basic human need such as shelter should be thought of as an investment at all. In addition to home-ownership based on debt financing, the reason that house values inflate is because of speculative purchasing and resale or community investment in infrastructure improvements (which should return to the community rather than to private owners). The only "investments" which will truly "pay off" as we age are investments in a life-sustaining environment and in personal, family and community relationships.
The fundamental, or paradigmatic, reason that we are in this irrational boom-bust investment-focused economy, that we are permanently undermining the earth's carrying capacity and climate for economic gain, and that we consider the life-sustaining environment as an "externality" is because of the axiom that "If you can't measure it, it's not real and you can't manage it". Since we began to think abstractly, rather than concretely, and since we began to mathematize, objectify and commodify our world, we have lost touch with what has real value. The purpose of life is not to "manage" it successfully, but to live it well in service to the earth which birthed and nurtured us and to the communities (both human and more-than-human) without which life would be a meaningless joyless struggle, and to the future generations which depend on us to leave behind a vibrant living world. Spreadsheets cannot guide us in living well or responsibly – the perennial wisdom of traditional cultures can.
I like Robert's attitude!
Robert is right, it is not JUST about the investment, but unfortunately, too many of us are taught to think that way.
I disagree, however, that we cannot measure or manage our environment. It is our failure to do so that has led us to our present dilemma. We do not need to quantify everything into dollars to be able to attach a measurable value to them, but we have found money to be a convenient measuring device, just as we find time, as in minutes and hours a convenient measuring device.
I often teach that the value of a durable home is not measured as much by the dollars not spent on maintenance as by the time not spent doing that maintenance. Perhaps we should re-quantify the savings from having a home that will also power your car to relate to the time spent earning the money to pay for the energy that would have had to have been bought, comparing also to the fact that you would need the car less, because you would be staying home more and working less...
Keep up the good thinking, Mr. Riversong!
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