Q: I recently sold my primary residence and currently hold the proceeds in my bank account. I am about 10 years from retirement and need to know the best way to invest the money. No suggestions?
A: Before investing, first determine 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 principal residence; double that amount to $500,000 for a married couple when the house was owned by you for two of the last five years. Profit is calculated by adding the acquisition costs to the major home improvements, then subtracting the selling price minus any commissions or fees paid.
Widowed taxpayers benefit from the full exemption ($500,000) if the principal residence is sold within two years of the date of the spouse’s death.
The IRS rules on selling your home (Publication 523) vary for members of the uniformed services and in common property states. Consult the spreadsheets or contact your tax preparer or advisor.
Now, assuming you’ve set aside enough money 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 unexpected expenses. Compartmentalize this bank account and review it periodically. Although idle money 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 tax-deferred and 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.
The proceeds from your home will be invested in your all-important after-tax investment account. This account will be used to manage your paychecks during retirement, with an emphasis on your marginal tax bracket. Determine if the current asset allocation is appropriate.
I disagree with the textbook advice to use age to determine the appropriate asset allocation. It has a lot more to do with our time horizon and our ability to stick to an investment plan during market downturns. Controlling emotional reactions and exercising self-discipline are more important than the number of years we have been on Earth. Nervous Nelly needs a much lower equity fund allocation than an aggressive investor. Either way, it’s best to have half of the investments in stock funds and the other half in bond funds and cash when the end of day report shows higher stock market declines at 1%.
The analytical answer is to choose a portfolio that achieves an average return that will allow you to take advantage of your retirement plans. History has proven that the average stock market return is around 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 go up over time, and the sooner your money works, the better the return. This strategy can be stressful when stocks are falling.
Cost averaging is an investment method that has gained popularity with paycheck deferrals on 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 of a concern as it is automatic and most people don’t try to time the market.
Instead of holding so much money in a bank account where the Federal Deposit Insurance Corp. is $250,000, decide on a long-term portfolio allocation. Only keep cash in the bank that you want to have on hand in an emergency, and transfer the rest of the cash to a high-quality, short-term bond fund in the after-tax investment account so that the average of the dollar cost is paid into your wallet. to plan.
Design this monthly systematic investment plan to sell the short-term bond and invest the proceeds in your chosen long-term allocation of stock and bond funds. This way, you move systematically from a high-quality, short-term bond fund to an appropriate long-term asset allocation mix of equity and bond funds. Eliminate decision stress and buy highly diversified funds with very low expense ratios.
When you hear about market performance, consider what you own and how your life has improved thanks to these great companies. Apple designs, manufactures and sells smartphones, PCs, tablets and wearables. Microsoft sells personal computing devices, systems and cloud services. Amazon is the largest online retailer in the world. Investing in diversified funds will allow you to participate in the profits of these companies.
Keeping up with market news doesn’t make you a better investor, but information overload can cause stress and inertia. Create a diversified portfolio that matches your personality and start investing systematically. After all, sleeping well is also an important goal.
Mary Baldwin, CFP®, is a paid financial planner at Buckingham Strategic Wealth in Indian Harbor Beach. Contact her at 321-428-4555 or email@example.com.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. The views expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®.