What to do with proceeds from sale of house (net $800K)?

What to do with proceeds from sale of house (net $800K)?
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A close relative is selling her house of many years. After paying off the mortgage she will have in the neighborhood of $800K. She has an additional $150K in CDs.

She gets very little from SS, but lives a mostly modest lifestyle. She’s in her mid-70s and of course, needs the money to last her the rest of her life and she would like to leave some inheritance to her children. She is currently renting a condo that she can buy for about $450K.

She is very risk averse after losing some money in the stock market in the early 2000s, but may be willing to invest some.

I am looking for suggestions on investing in the market, getting the best interest rates, and getting bonuses if it’s worthwhile. I know about the threads on liquid accounts, CDs, Depositaccounts.com, and doctorofcredit.

I’ve never had to deal with such a large amount of cash so I’d like advice to give her. Any suggestions are appreciated.

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I suggest that she research this issue on the bogleheads forum, as similar inquires have been asked/answered.

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$800k in her mid-70s? How much does she require to live annually? Because she shouldnt be trying to grow/maximize her nest egg balance, her priority should be to ensure what she already has outlives her. Basically, you need to take her living expenses until, say, age 100, and reverse engineer a required rate of return to ensure she wont be broke at age 100. That result will dictate how conservative she needs to be to survive without worry, and how aggressive she can be when thinking about leaving an inheritance.

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I agree with glitch99 100% there. She should figure out her spending requirements then work backwards from there.

Ensuring she has enough money to last her life is the #1 priority.
Leaving money to her kids should be a distant 2nd place.

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What’s the rent+upkeep run on the condo? If she’s in good health and plans on staying there, it might be a good return to buy in terms of rent savings. If she’s older and/or in poor health, renting may make sense and avoid tying up the money if she’ll need to move closer to family or to an assisted living place too soon down the road.

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I’d be leery of buying a place even if she is 70 and in good health. She may have 20+ more years to live but some considerations include if there is family nearby to help her with care, maintaining her condo etc or oversee live-in care vs paying for additional care. It really depends on involvement of nearby family. I’d opt for renting in a retirement community if she lives by herself and have an easier ability to move to assisted living.

As for above suggestions, I completely agree. If she is conservative, keep it conservative and in her comfort zone. At age 70, preservation is much more important than growth. CDs, savings (though low right now) and a much more sizable portion in bonds than stocks.

I handle my mother and mother-in-laws retirement accounts and suggested they put a bit of their cash money in fixed annuities to give them monthly payout for their life. I’m not sure if that was really the best decision for them payout-wise (they’ll both probably live past 80 and payout deteriorates with inflation) and decreases assets available to pass on do children/grandchildren but they both seem very happy to know they will receive that monthly check they can count on. For them the benefit is that it keeps the money out of their hands and they don’t have the ability to spend it. Some don’t know what to do if they suddenly come into many thousands after a house proceed and have 800k like OP’s situation. After retirement 401k is not an option and they almost need it to be tied up to conserve it. You have to understand if this is her situation or not.

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It sounds like she was able to live on her SS and investment income before selling the house. To keep things the simplest, avoid opening multiple accounts to chase rates. Before yesterday’s rate cut, MMFs at brokerages were paying 1.75% to just under 2%. That would generate $14K to $16K to supplement her SS, with full liquidity.

Brokered CDs at Fidelity have rates ranging from 2.1% to 2.5% for 10 years, and 2.3% to 2.6% for 15 years. They can be sold on the secondary market, if necessary, but I wouldn’t tie up the entire $800K in those, only a portion.

A better option might be funds. I use ETFs myself, but I’d recommend NTF mutual funds for her, because she could buy them and set dividends to reinvest automatically. It’s a bit more of a hands-off approach that might be simpler for her. The more conservative would be a ultra-short bond fund. Those have very little price fluctuation. Current SEC yields on ultra short corporate bond funds at Fidelity range from 2% to 3%. I prefer corporate for the higher yields, but you can also consider Treasuries, other government bond funds, or an all-in-one bond fund. Going for longer maturities will increase yields with a corresponding increase in price fluctuation.

More conservative stock mutual funds would be among those that throw off more income, like utilities funds, or those that invest with the goal of income vs. capital appreciation.

There are all-in-one-funds, often called allocation funds, that are a mix of stocks, bonds, and other not necessarily plain vanilla investments, often funds-of-funds. I avoid those, because they often have investments that I wouldn’t buy otherwise.

Overall, most of my ETF investments currently yield 3.5% to 6%. I have long term corporate bond, high yield bond, preferred stock, and high dividend stock.

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Make sure she doesn’t forget the capital gains tax on any profit above the exemption, if applicable.

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One advantage of buying the condo is they could use a 1031 exchange to offset some of those capital gains. That could then be used as the inheritance ( the paid for condo ) and heirs get a basis step-up at that time as well.

Regarding capital gain, were she married and did her spouse passed away while co-owning the house? If so, the gain would be valued at the stepped up basis at the time of that event. AFAIK.

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1031 is for investment proprieties including rentals, business, farm

It doesn’t apply to your primary residence

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She probably spends about $40-50K per year, but these costs may spike if she needs long-term care. She gets virtually nothing from SS and she has been spending down her savings over time. This has been accelerating because of less money saved earning less interest.

I was thinking of something a little more aggressive, such as some bonds or even some dividend-paying stocks like ATT (T). There is something known as Dividend Aristocrats.

Your post seems to be well-liked, so I may just suggest a CD ladder.

I like your thoughts. VOO has about a 1.44% yield. This is not as good as CDs, but there is hope for growth with this index fund.

Could you share which ETFs you own that yield 3.5-6%? Thanks

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Thanks. Her husband passed away a few years ago and the house gets a stepped-up basis to the full value at the time of his death. I believe this only applies in community property states. I don’t think the house has appreciated another $250K since then.

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Corporate bonds: IGLB, SPLB
High yield corporate bonds: IHYV, USHY, FALN
Senior loans: SRLN
Preferred stock: PFF, PSK
High yield stock: SPYD, FDVV, XSHD

If she’s very risk averse (per your OP), I wouldn’t pick VOO or any other general stock fund that mimics the broad market that has a history of dropping 50% and taking a couple of years to recover. Especially when the yield is nothing special and, at her age, she may or may not have the time to wait it out for a recovery, and she’s highly reliant on drawing down her savings to live.

Per your OP, “she lives a mostly modest lifestyle” yet later you say “she probably spends about $40-50K per year”. On what? We spend less than that for a household of 4!

Still, if she has $950K, at her current rate of spending, it would last 19 to 23 years, not including income it might generate.

Here’s a link showing the type of income that I could easily generate with $950K using what I consider fairly conservative ETFs:

Portfolio Visualizer IGLB, PFF, VPU

I wouldn’t put the whole $950K in any one investment, contrary to the illustration. But it shows the wide range of income possible. Even the lowest yielding of the 3, VPU, generates more income than what you think she’s spending. I used VPU to give an example of a more conservative stock investment that has the same testing period as the other 2 ETFs.

If you split the $950K evenly among the 3, it would look like this:

An Even Allocation Among IGLB, PFF, VPU

Notice that such a portfolio would have generated over $50K in dividends per year since Jan. 2010, plus the value would have grown to over $1.4M. No need to worry about outliving funds, IMO.

I stand by my earlier recommendations. Use Portfolio Visualizer to input some conservative mutual fund and/or ETF symbols of corporate bonds, government bonds, preferred stocks, income-generating common stocks. Look at the possibilities. Show them to your relative. Pay attention to the Max Drawdown column and the time it took to recover.

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Something more aggressive to what end? To hopefully pad the inheritance she leaves behind? Because aggressive options come with more risk, and right now she’s right on the line of being self-sufficient and safely secure for the remainder of her life, without any return at all. You dont want to put that at risk just for the sake of potentially padding her heir’s pockets.

Figure out how much she needs, with a relatively safe return, to cover the rest of her life. For example, lets say $600k earning 2% should cover her until age 100. Which would leave $200k to get more creative with, since it’s money she’s probably not going to need anyways.

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I agree with you @glitch99 that OP’s relative shouldn’t be getting aggressive with the money, especially since OP said, “She is very risk averse”. Individual stocks at this point would be highly inappropriate. Sure, AT&T is yielding over 5%. So are some of the ETFs that I mentioned.

OP, “hope for growth” doesn’t pay the bills. Cash flow does.

Does that include rent on the condo?

How good is she with her budget and not overspending or wasting money?

Sometimes handing someone a pile of $800k can be a horrible temptation for them to think that with soooo much money theres no big deal if they buy a new car, a boat, a timeshare… and in a few years half of its gone.

She is in mid 70s. If there are no medical issues at this time, there may be a few good years left. Simplification is the key.

Is the condo so expensive because it is close to big employers? Maybe a cheaper (farther away) condo would suffice or how about renting a 55+ apartment? Would she like to live with kids?

Maybe it is better to forego the volatility of the market altogether and put the money in a savings account bearing 2%