Investing in The Sun: Solar Power As A Retirement Investment Strategy

retirementThere is no such thing as a perfect retirement investment, but solar panels may come close. That’s the lesson retiree Diane Hammond learned when she decided to invest in a home solar power system. Most everyone knows that installing solar panels will reduce your carbon footprint, but fewer people are familiar with viewing them as an investment opportunity. With a few simple changes, Diane’s eliminated the almost $1,000 a year that she was spending on electricity bills and now, she’s actually earning an additional $1,500 / year in income. Here’s how she did it:Like many retirees, Diane’s money was invested in lower-risk vehicles. Her journey began with a $30,000 certificate of deposit (CD) that had reached maturity. The CD was earning less than 1% annually. After consulting with EnergySage, Diane learned that reinvesting this money in a solar photovoltaic system (also known as solar panel system or solar power systems) for her home would be low risk, too, but that the potential returns on her investment could be much higher. Solar panels could be a great way for her to get the higher returns associated with more traditional investments such as stocks and bonds, without exposing herself to the unpredictable fluctuations of those market.

EVALUATING HER OPTIONS

Diane considered three options for installing a solar panel system:

Option 1:   Buy the system for a gross price of $24,000.  After rebates and tax credits, the system would cost $14,000.

Option 2:   Lease the solar power system with no-money upfront. This option would lower her electricity rate and save her on average $180 a year for 20 years for a total savings of over $3,600 with no out-of-pocket expense.

Option 3:   Sign up for a pre-paid solar panel lease – a one-time payment of $11,700 for a 20-year lease for the solar panel system. This means that Diane paid all of the lease payments upfront at the beginning of the lease. Under this scenario, the solar leasing company owns her solar panel system and is responsible for any maintenance over the life of the lease.

(For a discussion on how to evaluate the various financing options available, click here.  Also, the EnergySage Solar Marketplace will help you to request quotes from installers and automatically calculate all of the costs and financial benefits related to the financing options in each quote you receive so that you can quickly and easily evaluate which option makes the most sense for you.)

While the no-money down solar lease was an attractive option, Diane chose to sign-up for a prepaid solar lease due to the financial benefits outlined below.  She opted not to go with Option 1—purchasing the solar power system outright—since as a retiree, she’s on a fixed income and also didn’t have enough taxable income to immediately take all the federal tax credits in one year.

FINANCIAL BENEFITS

Diane’s decision to go solar resulted in some very significant financial benefits:

1)      She eliminated her electric costs over the term of her lease (20 years). This has the benefit of converting what had been a variable cost to a fixed cost ($0) while also protecting herself from exposure to rising and volatile electricity costs. Today, she gets free electricity that’s worth about $1,000/ year.  As the price of electricity from her utility rises over time, she will be saving even more money every year. Current projections for electricity rate increases estimate that in 10 years, her annual savings will rise to $1,300.

2)      Massachusetts, the state where Diane lives, has a solar renewable energy credit (SREC) program that allows owners of solar PV systems to receive income for the renewable energy that they generate. With the pre-paid solar lease option, Diane retains the ownership rights to the SRECs her system will generate. As a result, she will generate an additional $1,500 per year for each of the next 10 years from SRECs sales. For retirees like Diane who are on fixed incomes, this is a very valuable benefit of going solar, effectively creating an annual annuity.

3)      Diane’s investment is delivering impressive returns. Her solar panel system generates a yearly benefit of $2,500 which represents an amazing 21% return / year — far in excess of the returns generated by more traditional investments such as stocks and bonds (which historically return about 5% for bonds and 6-9% for stocks). More importantly, Diane’s 21% return is significantly more than the less than 1% she had been earning on her CDs.

4)      Diane also receives additional benefits because she decided to invest in solar instead of stocks or bonds. Because a portion of her returns are in the form of savings, not income, they are not subject to taxation like returns from more traditional investment vehicles would be. Also, the returns that Diane is earning through her investments are essentially risk free—making them perfect for retirees like her who have low risk profiles.

5)      After making her investments, Diane still retains a good deal of liquidity.  She invested a total of $11,700, which means that the remaining $18,300 of her original $30,000 is still available to her if and when she needs it. She will also have access to the $1,500 in new yearly income she’s receiving from her SRECs as well as the $1,000 that she’s freed up by eliminating her electric bill.

6)      The addition of the solar panel system has increased the value of Diane’s home by an additional 3%-4%. Should Diane decide to sell her home in the future, that becomes another source of additional money to fund her retirement.

Most retirees or people nearing retirement don’t immediately think about solar energy as a way to fund their retirements. But, as Diane’s story illustrates, investing in a solar panel system, especially in states with attractive rebates and other incentives is an ideal investment vehicle. It’s essentially a low-risk, high-return investment. It’s a way to eliminate a volatile, variable expense; increase property values; and possibly create an income-generating annuity. And those are just the financial benefits!

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