Advice for Investment on House Sale Proceeds for Income

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
sudonym
Posts: 2
Joined: Tue May 31, 2022 12:20 pm

Advice for Investment on House Sale Proceeds for Income

Post by sudonym »

We are in the process of building a new house, and have just sold our existing. I was originally planning on using the proceeds ($250K) to do a principal reduction when we convert to a permanent 30 year mortgage, in order to bring our monthly payment in line with what I budgeted for our mortgage expense (including property tax and insurance) when we decided to build. However, with the low interest rate we have for the mortgage (as well as a desire to maximize the interest deduction), I was thinking now it might make more sense to invest the $250K. I would not be too risk averse in terms of the initial investment fluctuating in value short term. However, we do need a yearly income from this investment of $8K to $10K in order to pay property taxes and insurance.

Debt: Construction to Perm loan, for current house being built. Permanent mortgage rate will be 3.375% (30yr). No other debt.

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 5.75% State

State of Residence: Georgia

Ages: 47, 44, 6, 4

Desired Asset allocation: 80% stocks / 20% bonds

Total Portfolio: Mid 6 figures

Assets

Emergency funds: 1 month

His 401k@Alight (Accenture - Previous Employer):
33.1% Vanguard Target Retirement 2040 Trust Select (0.045) - $175K
1.9% Vanguard Institutional 500 Index Trust (VFFSX)(0.011) - $10K

His 401k@Fidelity:
18.2% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)(0.02) - $96K
2.3%Vanguard Extended Market Index Fund Institutional Shares (VIEIX)(0.05) - $12K
2.1% Vanguard Total International Stock Index Fund Institutional Shares (VTSNX)(0.08) - $11K
1.9% Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX)(0.035) - $10K

His HSA@Fidelity:
1.7% Fidelity 500 Index Fund (FXAIX)(0.02) - $9K
0.6% Cash - $3K

His Rollover IRA@Merrill Edge
5.1% Apple (AAPL) - $27K
0.6% Vanguard Long Term Bond (BLV)(0.05) - $3K
0.4% Microsoft Corp (MSFT) - $2K
1.7% SPDR S&P Dividend ETF (SDY)(0.35) - $9K
0.9% Vanguard Total Bond Market (VBTLX)(0.05) - $5K
1.5% Vanguard Total Stk Market (VTI)(0.03) - $8K
0.4% Vanguard Total Intl Stk (VXUS)(0.07) - $2

Hers SEP@Merrill Edge
0.9% IShares MSCI USA (SUSA)(0.25) - $5K
1.3% Vanguard Total Bond Market (VBTLX)(0.05) - $7K
2.6% Vanguard 500 Index Fund (VFIAX)(0.04) - $14K
0.2% Vanguard Health Care ETF (VHT)(0.1) - $1K

Hers Taxable@Computershare
1.3% Coca-Cola(KO) - $7K

His Taxable@eTrade (Employee Stock)
23.4% Workday (WDAY) - $127K


Questions:

Question 1: Is my thinking above sound, in that in today’s environment (corrected stock/bond market, rising interest rates) it makes more sense to invest rather than reduce the principal of our 30 yr note?

Question 2: If so, what would be the best investments given our goals above?

Thanks in advance!

Sean
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: Advice for Investment on House Sale Proceeds for Income

Post by sycamore »

Welcome to the forum sudonym!
sudonym wrote: Thu Jun 30, 2022 9:24 pm Question 1: Is my thinking above sound, in that in today’s environment (corrected stock/bond market, rising interest rates) it makes more sense to invest rather than reduce the principal of our 30 yr note?

Question 2: If so, what would be the best investments given our goals above?
I think it's a reasonable bet that you'll beat 3.7% using a mix of stocks and bonds. But I wouldn't say it's a clear choice decision. Like some people simply have a preference for avoiding/minimizing debt, but that doesn't sound like you.

I would definitely run through some "bad outcome" scenarios. Example: the "lost decade" after the dot-com crash was pretty brutal and hard to endure if you were hoping the $250k was going to grow during that time. Not only was there a significant crash but you'd have withdrawn $10k/year for 10 years for taxes & insurance, also depleting your capital.

Another example: Vanguard's LifeStrategy Income fund is 20% stocks/80% bonds. That's a rather conservative allocation, but it's down about 12% year to date. Imagine if you invested $250k at the beginning of 2022, withdrew $10k, and then saw your $240k dropped to $211k. Would you be able to sleep well knowing it would feel like you lost 3 years' worth of taxes & insurance?

I think a major factor is whether your job situations are stable. If so, I'd feel more comfortable taking investing the $250k, and also more comfortable taking on more stock risk.

But if not, and you'd have trouble covering the $10k taxes & insurance otherwise, I'd be more inclined to keep the $250k in safer investments like High Yield Savings Accounts, some I Bonds (up to $10k per person per year), maybe a short-term TIPS fund.

On a side note, I see you have no Roth IRA although you do have a Rollover (Trad) IRA. Do you make IRA contributions? I think that making a Roth contribution could be very helpful long-term. Having the $250k (I mean not paying off the mortgage right away) gives you some flexibility to make a Roth IRA contribution if you otherwise didn't have the cash for it.
Topic Author
sudonym
Posts: 2
Joined: Tue May 31, 2022 12:20 pm

Re: Advice for Investment on House Sale Proceeds for Income

Post by sudonym »

Thanks for the welcome!

- You are correct in that I am not totally debt adverse, and we feel pretty safe in terms of jobs (I work an established software company, my wife is a self-employed psychologist).

- I definitely remember the "lost decade", as I lived in the bay area in the late 90s and worked for a .com that went bust. My first experience with paper wealth that vanished :-P . Given our retirement timeline (~20 years), I'm OK with the scenarios you mentioned tbh. I am leaning towards at least some percentage investment into a short term TIPS though, just given the uncertainty and volatility at the moment.

- Would there be any reason to find a dividend/income based stock ETF (where dividend could cover our taxes/insurance) vs. an index based (Total and Intl ETF), selling enough yearly to cover?

- I think we will definitely start max'ing out I Bonds. Given we won't be needing the first payment of Taxes/Insurance for ~18 months, this gives us time to also use the interest at least from our initial 20K purchase towards that if needed.

- Regarding Roth IRA, our combined income is too high for a traditional (296K as of 2021); however I have not explored a backdoor Roth yet, so that may be an option. However, I do max out my regular 401k contributions, so I may adjust to split some of that to a 401K Roth.

Thanks again!
rossington
Posts: 1824
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Advice for Investment on House Sale Proceeds for Income

Post by rossington »

If you both earn 296k combined why can't you afford the 10k expenses?
Both in mid to late 40's with 2 young children and total portfolio is mid 6 figures. You seem to be behind in savings here.
Are you really thinking this through?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Post Reply