Menu Close

I've sold my home; I'm close to retirement. Now how should I invest that cash?

view original post

Q: I recently sold my primary residence, and I am currently holding the proceeds in my bank account. I am about 10 years from retirement, and I need to know the best way to invest the cash. Any suggestions?

A: Before you invest, start by determining if you will have a tax bill because of this sale.

The IRS allows a tax-free profit of up to $250,000 when a single person sells their primary residence; double this to $500,000 for a married couple when the home was owned by you for two of the last five years. The profit is calculated by adding the acquisition costs to the major home improvements and then subtracting the sale price minus any commissions or fees paid.

Widowed taxpayers get the full exemption ($500,000) if the primary residence is sold within two years of the date of the death of the spouse.

The IRS rules on selling your home (Publication 523) vary for members of the uniformed services and in community property states. Check out the worksheets or contact your tax preparer or advisor.

Now, assuming you have set aside enough cash for your 2022 tax bill in your bank account, it’s time to review your financial plan.

First, set aside an emergency fund that includes extraordinary expenses, such as vacations, vehicle expenses, home repairs and unforeseen expenses. Compartmentalize this bank account and periodically review it. Although idle cash does not appreciate, having an emergency fund can be a lifesaver and is essential when we have unexpected financial emergencies.

Next, review your current portfolios, both the tax-deferred and the after-tax investment accounts. Combine old 401(k)s and IRAs. Consolidate after-tax accounts. Diversification is not defined as multiple accounts with multiple custodians. When you simplify, it’s much easier to manage.

Your home proceeds will be invested in your very important after-tax investment account. This account will be used to manage your paychecks during retirement, with the focus on your marginal tax bracket. Determine whether the current asset allocation is appropriate.

I don’t agree with the textbook advice to use age to determine appropriate asset allocation. It has much more to do with our time horizon and our ability to stick with an investment plan during market downturns. Controlling emotional reactions and exercising self-discipline is more important than the number of years we’ve spent on Earth. Nervous Nelly needs an allocation to stock funds that is much lower than an aggressive investor. Somehow it feels better to have half the investments in stock funds and half in bond funds and cash when the end-of-day report shows stock market declines that exceed 1%.

The analytical answer is to choose a portfolio that achieves an average return that will enable you to enjoy your retirement plans. History has proven that the average stock market return is about 10% per year. The problem exists with so few years falling into the average category. The buy-and-hold group gets this average by staying invested.

Markets rise over time, and the sooner your money goes to work, the better the return. This strategy may be stressful when stocks are declining.

More: Don’t let emotions drive your investments: Take stock of your options

More: Pay cash, finance or lease a vehicle? Key factors help drive best deal

Dollar-cost averaging is an investment method that has gained popularity with paycheck deferrals to retirement accounts. Deploy this same concept with the proceeds from the sale of the house. At predetermined periodic intervals, money is transferred, and specific funds are purchased. Usually this is less worrisome because it’s automatic and most people don’t try to time the market.

Instead of holding so much cash in a bank account where the Federal Deposit Insurance Corp. limit is $250,000, decide on a long-term portfolio allocation. Keep only the cash in the bank that you want to have readily available for emergencies and move the rest of the cash into a short-term, high-quality bond fund in the after-tax investment account to be dollar-cost averaged into your portfolio plan.

Design this monthly systematic investment plan to sell the short-term bond and invest the proceeds into your chosen long-term allocation of stock and bond funds. This way, you are systematically transferring from the high-quality, short-term bond fund into the long-term appropriate asset allocation mix of stock and bond funds. Take the stress out of the decision and buy highly diversified funds with very low expense ratios.

When you hear about the market performance, consider what you own and how your life has improved because of these great companies. Apple designs, manufactures, and sells smartphones, PCs, tablets, and wearables. Microsoft sells personal computing devices, cloud systems and services. Amazon is the world’s largest online retailer. Investing in diversified funds will allow you to participate in the profits of these companies.

Constantly monitoring stock market news does not make you a better investor, but the overload of information may cause stress and inertia. Create a diversified portfolio that fits your personality and begin to invest systematically. After all, sleeping well is an important goal, too.

Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®.

This article originally appeared on Florida Today: I’m closing to retiring and I’ve sold my home. How should I invest?