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AA/investment options for home sale net proceeds and not buying for 4-5 years?
Old 04-02-2014, 09:26 AM   #1
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AA/investment options for home sale net proceeds and not buying for 4-5 years?

I am currently planning on selling my house this summer and expect to net ~$380K. Based on my (and fiancée’s current plan (marriage date TBD based on when it makes sense to do so) we will not be buying another home for 3 to 5 years (renting).

Ignoring all the tax ramifications of not buying a new home in 24 months (I am pretty sure I haven’t used any home sale cap gains credits, since I gave my half of first home to Ex in 1997 -- I’ll probably see a tax advisor on the whole tax thing), I was wondering if anyone on this board has gone through a similar situation and specifically what type basic AA they used for their “net proceeds” that they knew they would holding for more than 2 years, and probably closer to 4 years.

a) I am guessing about 150-200K (half the cost of new home) will go toward new home cash purchase in ~4 years)
b) probably need to by a new car/truck in the next year and dump my two 15 year old beaters (~35K)
c) The rest (~$150K) I was just planning to allocate across my current Vanguard after tax accounts which are currently ~60/40.

So the real struggle I am having is what to do with the $200K I’ll need in about 4 years for buying, moving, new stuff. I have time to figure this out, sale sign is going up in early to mid June 2014.

I don’t want to take too much risk, actually I would be happy just stay even with true inflation(1 or 2 points above CPI? JMHO) on the ~$200K Bucket “a” (1 or 2 points above CPI? JMHO on inflation) after taxes on interest, qualified and non qualified dividends, ST/LT cap gains…

My current Candidate/Base Options rolling around in my head for what I will call the $200K bucket (a).
1) Low risk -- CDs, Treasuries/Treasury funds, Short Term Bond Funds,MM….. (low risk, and real low return it seems as of the last couple of years anyway). Actually looks like the money has a high chance of “decaying” in value. But minimal risk if a “crash” hits.
2. Med risk – spread/diversify it out in various mutual funds, maybe go with something closer to a 50/50 basic AA. A bit roll of the dice approach.

Anyway, I know, there are a lot of approaches based on tax ramifications and risk I am willing to take. I was hoping to get some ideas or suggestions from people who may have been through this before (or something similar), so I can be halfway halfway knowledgeable before I begin more formal research and possibly/probably discuss with professional tax/ICFA type.

Thank You in advance for any input
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Old 04-02-2014, 09:31 AM   #2
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For the money you anticipate needing in four years I would not invest in equities. That is not a long enough time horizon for you to recover from a bear market.

For bond funds, anything that is short term in duration should be fine, but you still may end up losing some money if interest rates rise.

If it were me, and I was reasonably certain I would be using the money within four years, I would lock onto a high yield CD. I believe GE has a five year CD at 2.25%. I would guess the penalty for early withdrawal is one year of interest, so that may not be ideal. But anything in the 2% range is probably about as good as you are going to get for an investment without interest rate risk.
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Old 04-02-2014, 10:00 AM   #3
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I just went through this/am going through this with the sale of our home (about 240k in gains). The first thing I would do is verify your tax ramifications and whether you qualify for the 250k/500k home exclusion. If you can't exclude all profits than your tax hit may be quite large and I wouldn't pull the trigger until you've worked out how to minimize/eliminate it.

Basically we are going to put the bulk of the money into high interest savings accounts (e.g. 0.87% at ally), CDs, I-Bonds, short-term bonds. We might put ~10% into equities with the reasoning being: if the market does well we will keep up with inflation. If the market tanks 50%, a loss of 5% won't affect our plans for the money.
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Old 04-02-2014, 10:27 AM   #4
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If it is money you need in the next 2-4 years, cash, cash equivalent, or CD. Equities shouldn't enter into the though process as that amounts to speculation. IMO CD is the way to go.
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Old 04-02-2014, 10:42 AM   #5
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Quote:
Originally Posted by Ready View Post
For the money you anticipate needing in four years I would not invest in equities. That is not a long enough time horizon for you to recover from a bear market.

For bond funds, anything that is short term in duration should be fine, but you still may end up losing some money if interest rates rise.

If it were me, and I was reasonably certain I would be using the money within four years, I would lock onto a high yield CD. I believe GE has a five year CD at 2.25%. I would guess the penalty for early withdrawal is one year of interest, so that may not be ideal. But anything in the 2% range is probably about as good as you are going to get for an investment without interest rate risk.
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Originally Posted by photoguy View Post
I just went through this/am going through this with the sale of our home (about 240k in gains). The first thing I would do is verify your tax ramifications and whether you qualify for the 250k/500k home exclusion. If you can't exclude all profits than your tax hit may be quite large and I wouldn't pull the trigger until you've worked out how to minimize/eliminate it.

Basically we are going to put the bulk of the money into high interest savings accounts (e.g. 0.87% at ally), CDs, I-Bonds, short-term bonds. We might put ~10% into equities with the reasoning being: if the market does well we will keep up with inflation. If the market tanks 50%, a loss of 5% won't affect our plans for the money.
Thanks folks for the responses. 2 votes for basically my option#1 approach (Low Risk). Kind of the way I was leaning (edited out text) There is always that 10%, 20% chance I end up providing most/all $$'s for full cash purchase (~$300K or a bit more). (deleted text)

Photoguy, My gain will be less than the $250K (180-200K, haven't done a formal estimate), just hate to eat it all up, but that's the way of the tax code.
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Old 04-02-2014, 10:45 AM   #6
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What about REITS? The theory being that if real estate takes off, you will have more than $200,000 to buy your new place in 5 years and if real estate tanks, you won't need $200,000 for your new place.
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Old 04-02-2014, 10:51 AM   #7
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Being less risk-averse than most, I might go with Wellesley. Especially if it was looking more like 5 years instead of 3 years. If the shorter term looked most likely I might try bonds and cash.
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Old 04-02-2014, 11:07 AM   #8
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I would get it invested in something besides cash. 5 years is a long time to earn nothing on that much money.

Personally I would go with mostly stocks or at least your current 60/40 mix. Even if there is a pullback you can keep renting until things recovered.
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Old 04-02-2014, 11:34 AM   #9
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Being less risk-averse than most, I might go with Wellesley. Especially if it was looking more like 5 years instead of 3 years. If the shorter term looked most likely I might try bonds and cash.
I like the W&W funds. I would be very comfortable with a large chunk of $$'s in VWIAX with a 5 or more year horizon. As the timeline becomes clearer over the next few months (3 years, 5 years...heck we may decide to just rent for 10 years (although doubtful) I can hopefully get this nailed down a bit. Guess I need to get "plans" for 3, 4, 5, and over 5 years in place by August or so. The 4 year thing does to land me right in the middle of the conservative and moderate approach.

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What about REITS? The theory being that if real estate takes off, you will have more than $200,000 to buy your new place in 5 years and if real estate tanks, you won't need $200,000 for your new place.
Appreciate that idea. I will take some time to educate myself on REITs.
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Old 04-02-2014, 11:49 AM   #10
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Appreciate that idea. I will take some time to educate myself on REITs.
I don't know much about them myself or if they have REITS that might represent what the housing market does on a diversified broad scale.

It just seems that if you have earmarked the money for a particular future purchase and want that money to have the same purchasing power in five years for that purpose, then you should look for something that has strong positive correlation to that purchase.

If you said in five years that you wanted to be in the stock market with $200,000 and wanted to make sure you had the same purchasing power as today then I would probably say buy a stock index fund.

Is there a housing market REIT?
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Old 04-02-2014, 12:35 PM   #11
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The performance of a national REIT may have little correlation to the performance of the specific house in the specific neighborhood that you want to purchase four years from now. I wouldn't sleep well having to think about that for the next four years.
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