What to do with Home Sale Proceeds

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bigguy8437
Posts: 252
Joined: Tue May 26, 2015 12:02 am

What to do with Home Sale Proceeds

Post by bigguy8437 » Sun Mar 11, 2018 10:33 pm

This post is for my mom who is selling her house soon. See below for current financial status/facts and questions:

Emergency funds: 3-6 months expenses
Debt: none
Tax Filing Status: Single
Tax Rate: not sure - believe 25% or 28%
State of Residence: MA
Age: 59.5
Desired Asset allocation: see comments below
Desired International allocation: 0% of stocks - prefer 100% US (similar to Bogle)
Salary: 3600/month after tax (occupation = high school teacher)
Alimony: 3400/month - ends at age 65

Current retirement assets

Taxable
$14,500 - Vanguard Total Stock Market (VTSAX) (.04%)

Her Roth IRA at Vanguard
$149,000 - Vanguard Total Stock Market (VTSAX) (.04%)

Her Traditional IRA at Vanguard
$284,000 - Vanguard Total Stock Market (VTSAX) (.04%)

Her Massachusetts teacher retirement plan (pension?)
$28,000

Total of above assets: $475,000
House Equity: $650,000
Net Worth: ~$1,125,000

Contributions

New annual Contributions
$6500 her Roth IRA
$1-2K/month taxable (will have more concrete idea after selling house)
**she also contributes about 11% each paycheck to the MA teachers retirement plan, I think thats for her pension.

Questions
1. With my mom about to sell her house next month, she is going to have about ~$635K to invest. I want her to invest all of that in Vanguard Total Stock market and be aggressive with it for these following reasons: she plans on working the next 5 years until 65, will be receiving alimony for next 5 years until 65, will have a pension of about $1300/month after she retires for rest of her life (MA teachers get a pension but no social security), has low expenses already (she already has an apartment lined up and rent is $1800/month, no car payments/debt/anything, single). For those reasons I want her to be aggressive since investing in stocks is the greatest wealth builder - I know it will be tough if stocks do drop, but I think she can afford to do it. Anyone greatly disagree?

If she used house proceeds to invest in stocks her new assets would look like:
Taxable
$650,000 - Vanguard Total Stock Market (VTSAX) (.04%)
Roth IRA at Vanguard
$149,000 - Vanguard Total Stock Market (VTSAX) (.04%)
Her Traditional IRA at Vanguard
$284,000

Along with the $1,300/month pension for life after retirement.

2. How much does her potential inheritance factor into the above decision/question, if any at all? She is set to receive a multi-million inheritance in about ten years. She also receives an annual roth IRA gift, in additional to about 10-15K annually to invest (this is from her family which gives her the money). Should any of those factors go into the question of whether she can afford to go 100% stocks?
Last edited by bigguy8437 on Mon Mar 12, 2018 12:27 am, edited 2 times in total.

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Sandtrap
Posts: 5217
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: What to do with Home Sale Proceeds

Post by Sandtrap » Sun Mar 11, 2018 11:01 pm

Welcome.
1.
No. 100% equities is out. Somewhere between 60/40 and 30/70.
Because one can "afford to lose" doesn't mean "lose". Risk management should be appropriate to her age as well as holdings.
2.
No. Future anticipated proceeds that far out should not effect taking more risk now. Anything can happen.
3
Read:
Outstanding write up on the 64/40 allocation by Bernstein.
http://web.archive.org/web/20061214061 ... in6040.pdf
R. Ferri on Bernstein's 60/40
http://www.etf.com/sections/index-inve ... nopaging=1
Read:
Risk Tolerance (what is your "sleep factor"?)
https://www.bogleheads.org/wiki/Risk_tolerance
4
Implement:
Bogle 3 Fund Portfolio Basics and Beyond
https://www.bogleheads.org/wiki/Three- ... _portfolio
5
Disperse and fund this way:
Funding Priority (what do I do first?)
https://www.bogleheads.org/wiki/Priori ... vestments
Tax Efficient Fund Placement
https://www.bogleheads.org/wiki/Tax-ef ... _placement
6
Once she sells her home, where is she going to live?
During this time of transition she will need this so have it adequately funded in High Yield Accounts and, for longer time horizons, Short Term CD's. Goal is liquidity, accessibility, and security of principal.
Read:
Emergency Fund
https://www.bogleheads.org/wiki/Emergency_fund
7
Vanguard Total Bond will anchor the portfolio. Would she be prepared to lose 50% of everything in equities. At her age and despite incoming assets in the future, it would be unwise and not prudent at all. If younger and in the accumulation phase, then yes, "wealth building" is a good focus. But, no longer being 20-30 years of age, and not in the accumulation phase, she has more to lose than to gain, and the focus is now on preservation of what she has and security of income stream in retirement. (minimum 40% fixed).
8
The goal for her funds are simplicity, security, and efficiency, with a balance of risk management and long term return.(Bogle 3 fund) What you set up now should lay a solid foundation whether or not the inheritance comes and no matter how much. In 10 years, the inheritance may not be that valuation or may take more years to disburse, despite what the trust or will documents say now. So it is prudent to be prudent.
"Don't count the chickens until they hatch", "bird in the hand . . . . "
9
Be prepared for financial and personal (and health) "black swans" because they can and do happen.

You have come to the right place.
Commend your wisdom to seek suggestions and input for a "bigger picture".
I hope I have provided useful help.
aloha
j :D

gotester2000
Posts: 547
Joined: Sun Nov 12, 2017 1:59 am

Re: What to do with Home Sale Proceeds

Post by gotester2000 » Sun Mar 11, 2018 11:45 pm

1.She should buy an apartment after selling the house. Is the pension inflation adjusted?
2.Keep the AA at 60:40 stocks. Dont take high risk to increase your inheritance pot.

carolinaman
Posts: 3208
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: What to do with Home Sale Proceeds

Post by carolinaman » Mon Mar 12, 2018 8:01 am

I agree that somewhere between 60/40 and 40/60 is probably best. It is not about what you think but what she thinks is right. You can argue pros and cons all day but in the end it is what she feels is best. One argument for a more conservative portfolio is "why take unnecessary risks when you have already won the game?".

chevca
Posts: 1874
Joined: Wed Jul 26, 2017 11:22 am

Re: What to do with Home Sale Proceeds

Post by chevca » Mon Mar 12, 2018 8:14 am

I disagree that she can afford to go 100% stocks, OP. She will get $1300/month from the pension and her rent alone is $1800/month.... and no SS in sight. How do you feel she can afford to take that much risk on money she needs to live off of??

I agree with others that 60/40 sounds about right for mom here. She has no need to take the risk of 100/0 at this stage of life, alimony not lasting forever, and a smallish pension to look forward to. If she gets the large inheritance in 10 years, great, that's just gravy. But, don't count it until it happens, maybe it doesn't, and even then there's still no need to take the risk of 100/0.

bigguy8437
Posts: 252
Joined: Tue May 26, 2015 12:02 am

Re: What to do with Home Sale Proceeds

Post by bigguy8437 » Tue Mar 13, 2018 6:38 pm

gotester2000 wrote:
Sun Mar 11, 2018 11:45 pm
1.She should buy an apartment after selling the house. Is the pension inflation adjusted?
I'm curious why you think she should buy an apartment. I don't think she has enough money to do that. I was going to say she could buy something once she receives the inheritance, but I don't think she can afford it especially since she lives in a medium-high cost of living area.

And thanks for the replies everyone, I think I'm going to do a 60/40 allocation, so she will have about 400K invested in total bond market that she will withdraw roughly 40k/year to live off of for the next 10 years (40k/year is roughly her expenses). Then after that she can dip into the taxable stuff. And then the inheritance will come eventually so hopefully everything will be all set from there on out.

gotester2000
Posts: 547
Joined: Sun Nov 12, 2017 1:59 am

Re: What to do with Home Sale Proceeds

Post by gotester2000 » Wed Mar 14, 2018 3:06 am

bigguy8437 wrote:
Tue Mar 13, 2018 6:38 pm
gotester2000 wrote:
Sun Mar 11, 2018 11:45 pm
1.She should buy an apartment after selling the house. Is the pension inflation adjusted?
I'm curious why you think she should buy an apartment. I don't think she has enough money to do that. I was going to say she could buy something once she receives the inheritance, but I don't think she can afford it especially since she lives in a medium-high cost of living area.

And thanks for the replies everyone, I think I'm going to do a 60/40 allocation, so she will have about 400K invested in total bond market that she will withdraw roughly 40k/year to live off of for the next 10 years (40k/year is roughly her expenses). Then after that she can dip into the taxable stuff. And then the inheritance will come eventually so hopefully everything will be all set from there on out.
Because it is difficult for single person to rent for indefinite time close to/in retirement age. With networth of 1.1M and salary/pension of 3600/1300 - buying a small apartment should not be difficult. Her income is sufficient to meet her expenses.

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