So what else should someone who isn’t retiring tomorrow, but plans to stop working within 10 years or so, consider doing with extra money sitting in a bank account after selling a home and buying or renting their next one?
First, sellers should remember their tax liabilities. Married couples generally don’t have to pay capital gains taxes on up to $500,000 of gains after selling their primary residence (it’s $250,000 for individual filers). After that, they’ll face long-term capital gains tax rates of 0, 15% or 20% depending on their tax brackets.
While stocks may seem expensive at the moment with the market on a tear, they’re still a worthy way to deploy cash, especially if the time horizon is at least five years. Yes, there’s risk and volatility, but a holding period of at least five years is likely to preserve the cash and then some. And there are areas of the market, such as international stocks, or out-of-favor sectors like energy, where investors can feel like they aren’t overpaying.
Another option for investors looking for the steady income of bonds without forsaking returns is to focus on stocks that pay dividends. Andrew Graham, a portfolio manager in San Francisco, says he’s put some clients’ real estate proceeds into income-generating strategies that include stocks of regional banks and chemical companies.
If the windfall amounts to more than 10% of a portfolio, then it’s wise to spread stock purchases over three or six months to spread some of the risk of buying on a day the stock market is unusually high or low.
Some homeowners, emboldened by their profit from selling a primary residence, may be tempted to use it to buy real estate as an investment. But managing rental properties usually involves more money, time and stress than expected — and in many markets, buying now would mean overpaying. Plus, real estate can be hard to unload.
Those who are bullish on real estate may be better served by investing in real estate investment trusts, which resemble mutual funds but own different types of real estate. They can provide the benefits of real estate investment without the aggravation.
Investing in cryptocurrencies, with their wild value swings and hazy futures, is too risky for someone nearing retirement. Regulatory uncertainty makes them even more of a gamble.
Still, there are some less conventional things to consider doing with the cash. Americans are living longer and needing more assistance; buying a long-term care insurance policy preemptively to pay for services that aren’t covered by standard health insurance could be prudent.
Assuming college education costs have already been taken care of, some generous parents may want to set up a family bank. Barry Kohler, a financial adviser in Portland, Maine, says he’s suggested that clients pay off their kids’ credit-card or other high-interest debt, but then have the kids repay those loans to their parents at 5% or 6% interest. In this market, that’s a pretty decent return.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
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