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Ask Bob: How Should I Invest Proceeds From a Home Sale to Create Retirement Income?

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Question

I fully retired at 66 years old. I estimate I need $40,000 to $45,000 per year in retirement income.

I have the following income and assets:

  • $2,900 gross monthly Social Security benefits
  • $300,000 in a recently converted managed IRA that I rolled over from 401(k).
  • $150,000 in an annuity which I can withdraw 10% a year without penalty. The annuity matures in four years.
  • $23,000 in Roth IRA
  • $13,000 in cash that will probably at first go towards a new home down payment and be replenished for emergency funds later.

My question: Where should I invest the $100,000-plus net after repurchasing a new home, to save on taxes etc.?

Answer

Some important assumptions need to be made and some questions need to be answered to accurately answer the reader’s question, said Lynn Dunston, a partner with Moneta Group.

Those include:

  • What is the reader’s risk tolerance? What is their history with investing? For the purposes of this discussion, Dunston is assuming a moderate risk profile with an assumed 5.69% return.
  • Will the reader be signing up for Medicare and a supplemental Medigap policy? This will increase their living expenses and reduce some of their Social Security. For this discussion, Dunston is assuming about $5,000 a year in Medicare-related costs.
  • What kind of annuity does the reader own — qualified or non-qualified? Is it variable or fixed? This is really important. Dunston is assuming non-qualified and variable.
  • When is the reader taking Social Security? Are they deferring it in order to receive a delayed retirement credit, or do they need the funds now?
  • What state does the reader live in? This will affect their state taxes.
  • Most importantly, what are the reader’s goals? Do they want to leave a legacy? Do they have a family? Are there other financial planning or tax-related goals that factor into this discussion? The reader said they want to “save on taxes” but what does that mean? Is there a broader tax context or need to save on taxes? What about health concerns?

“Without more context, a good financial planner is not in a position to answer your question about how your remaining $100,000 should be invested,” said Dunston.

That said, and for the purposes of discussion only and not for the purpose of giving advice without answers to the aforementioned questions, the reader’s best bet is likely to invest their funds in a taxable brokerage account, possibly even segmenting a year’s worth of expenses in cash, said Dunston.

“This will allow their IRA and Roth IRA to remain deferred as long as possible,” he said. “This will also give the reader some liquidity and could help them meet their living expenses before RMDs start at age 72.”

And, if their annuity is out of its surrender period in four years, Dunston said they may want to consider putting those funds in a no-load annuity via a 1035 exchange or, if the taxes wouldn’t be onerous, they could consider consolidating the annuity into your brokerage account. Some additional tax planning would, of course, need to be involved in that decision. A 1035 exchange is a provision in the tax code that allows a policyholder to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes.

The reader could also be a candidate for Roth conversions, but this would likely require them to use some of their taxable investments to pay for the tax bill that would come from the Roth conversions, said Dunston.

“Without further information, it is nearly impossible to give the reader good advice on their question,” said Dunston. “All else being equal, and with the aforementioned assumptions in mind, it does appear that they can meet your retirement income needs with a reasonable probability of success. In their case, Social Security and low living expenses will play a vital role in your retirement success.”

Ultimately, further planning would be needed before one could answer the reader’s question about how best to invest their remaining proceeds, said Dunston.

For her part, Kathleen Campbell, the founder of Campbell Financial Partners, also said it’s never easy to answer this sort of question in the absence of any additional information.

That said, Campbell suggests that the reader consider opening a high-yield savings account with a reputable bank, such as Synchrony Bank or Discover Bank, and put the $100,000 in that account.

According to Campbell, Synchrony is currently paying 0.6% interest and Discover Bank is currently paying 0.5% interest. “If the reader needs $45,000 per year in retirement income, then they need that $100,000 to not be exposed to any market risk, so they should not be ‘investing’ it,” said Campbell.

In her analysis, Campbell estimated the reader can expect to receive the following income:

  • $2,900 per month gross Social Security will end up being around $29,000 net after Medicare premiums and income tax.
  • About $9,000 per year could safely be withdrawn from the $300,000 IRA, which would be about 3% per year. That number, Campbell said, could decline depending on how the IRA is invested, if the account growth doesn’t keep pace with the 3% withdrawals. Also the after-tax value of the $9,000 would be closer to $8,000 (as far as real dollars to spend).
  • $15,000 per year in annuity withdrawals, but just for the next four years. And that will also be reduced to about $13,500, after taxes.

So, said Campbell, the above three income sources might just satisfy the high end of the reader’s living expense range. In four years when the annuity matures, it will only be worth around $90,000, if they withdraw the full 10% per year. “At that point, all they will have left to live on for 30-plus years would be the declining $300,000 IRA account, the $90,000 annuity proceeds, and the $100,000 that hopefully they will have put aside in an interest-bearing savings account. “If the reader is conservative in their spending, they might be able to make it, but that $100,000 should be a safety blanket, not exposed to market risk,” said Campbell.

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Email Robert.Powell@maven.io.