The real estate market may be cooling slightly, but those who have sold their homes recently or plan to will still be reaping big gains from Westchester, New York, to Oakland, California. Unfortunately for those close-ish to retirement, one of the usual go-to places to park extra cash — bonds — has become a no-go zone. With low interest rates and rising inflation, buying more bonds, often the core of a soon-to-be-retiree’s portfolio because of their relative safety, isn’t very attractive. Low interest rates yield paltry incomes and high inflation could eat away at the bond’s market value.
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.
