Sunny Investing: Grid-tied Solar Beats Annuities!
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In today’s investment environment the choice seems mainly between the uncertainty of the stock market or the unimpressive returns of safer investments such as savings accounts, CDs, and annuities. We make an alternate suggestion: consider an investment in solar.
We had occasion to compare the relative returns of investing in an annuity product vs. a solar electric system. While the two don’t seem much alike on the surface, they both have in common a significant capital outlay in exchange for a monthly dividend.
An annuity works by offering you a monthly payment for a fixed period of time based on a pre-determined interest rate, about 3.8% right now. A solar electric system also requires an up-front investment (unless you opt for financing), and offers a monthly “payment,” so to speak, in the form of reduced utility bills for the life of the system.
Like an annuity, the benefits of a solar electric system are realized over time; for economic models we usually use 25 years, the warranteed life of the panels (though the system is expected to remain operational 40-50 years). However, solar has the benefit that the “dividend” – your utility bill savings – actually increases over time as electric prices rise, unlike an annuity payment which is fixed.
Consider a married couple who are both 60 and in reasonable health and live in Maine. With $15,000 they can:
- Install a 5kW PV system which will provide roughly a $85 monthly benefit each month, which increases as electricity prices rise.
- Buy a joint lifetime annuity which will pay the couple $75 a month, which stays the same forever, not rising with inflation.
Given the choice, a lower electric bill looks like a much better investment for the next 25 years!
The Case in New Hampshire
In NH, even without the $2,000 state rebate, a solar investment still beats the annuity. In this case it’s more fair to compare a $17,000 solar investment to a $17,000 annuity. At that rate, the annuity will earn $85/month, which is pretty close to the solar in year 1. However, over the 25 years the solar becomes more valuable as the cost of electricity increases (averaging 4% a year right now) whereas the annuity stays the same. And, of course, you’re generating clean electricity the whole time rather than investing in a financial instrument.
The solar earns more, helps the environment, and takes strain off the grid. Who can’t feel good about growing with that?