How To Invest Your Home Sale Proceeds for a Comfortable Retirement
Weighing the benefits of selling your home and ways in which you can maximize your profits is key to generating extra income for a comfortable retirement. Your home sale proceeds can be used to fund other investments such as stocks, real estate investment trusts (REITs), annuities and life insurance.
- Written by Ebony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.
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Lamia Chowdhury
Lamia Chowdhury
Financial Editor
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.
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Toby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.
Read More- Published: June 1, 2023
- Updated: June 24, 2023
- 15 min read time
- This page features 13 Cited Research Articles
- Edited By
- Selling your home and investing the home proceeds is important because it allows you to maximize returns and get more income for retirement.
- Preliminary research is key to positioning your home in ways that will generate the most proceeds. It’s also important to understand local market trends to develop a competitive pricing strategy.
- Understanding your risk tolerance is important to ensure your strategy for growth yields returns you are comfortable with.
- Your home sale proceeds can be invested in stocks and bonds, mutual funds, annuities, permanent life insurance, REITs, a high-yield savings account and long-term care insurance as a source of income in retirement.
Assessing Your Financial Situation
It’s important to assess your financial situation to ensure you’ll have adequate resources for a smooth retirement. One of the biggest aspects of retirement planning is determining your housing plans – whether you would like to rent, age in place, sell your home and downsize, or relocate to a more retirement-friendly state. Once you have a proper plan in place, you can consider other opportunities to maximize your income.
One way in which you can leverage your financial resources for greater benefits is by selling your home. To start, determine what your plans are for retirement and establish a timeline to meet those goals. Then make a list of what you expect as income sources and expenses, and create a budget.
To maximize your retirement fund, consider other sources of revenue such as investments. Be sure to understand your risk tolerance to ensure your growth strategy returns yields you are comfortable with.
- Determine your retirement goals and timeline.
- Assess your risk tolerance and investment knowledge.
- Consider other sources of retirement income.
- Calculate how much you can afford to invest.
Why Is Investing Home Sale Proceeds Important for Retirees?
Selling your home and downsizing to more affordable housing allows you to use the remaining home sale proceeds to reinvest in other investments.
For example, say you sell your home and your proceeds net $450,000. Then you decide to downsize to a smaller ranch home for $300,000. Now you’ll have $150,00 to reinvest in your retirement portfolio.
Depending on your financial situation, you can invest the money in conservative and tax-efficient investments that can help generate enough income to live comfortably throughout your retirement.
Be sure to analyze your portfolio based on your risk tolerance for any new investments. For example, if the stock market shows a volatile pattern, it makes sense to allocate your portfolio to more favorable mutual funds rather than lose money on negative returns.
If you decide to sell your home, keep in mind that the home sale proceeds need to last you about 30 years in retirement. It is crucial to seek advice from a professional financial advisor before making a big investment.
Best Ways To Invest Money After Selling Your House
If you’re wondering what to do with the proceeds after selling your house, consider some available options that can help continually grow your money throughout retirement.
Stocks and Bonds
Stocks represent a share of ownership in a company. There are several different types of stocks, including growth stocks, value stocks, dividend stocks and blue-chip stocks.
Bonds are debt securities issued by governments and corporations to raise money. The main types of bonds are corporate bonds, government bonds and municipal bonds.
Stocks have the characteristic of being riskier and more volatile than bonds. Generally, stocks and bonds have an inverse relationship. When stock prices rise, bond prices fall – and vice versa.
- Stocks are a high-reward investment, with the potential to result in large returns over a long period of time.
- Bonds are stable and low-risk investments with fixed interest rates.
- Stocks are easily accessible by anyone who has disposable income.
- Interest payments from bonds can provide a steady stream of fixed income.
- Stocks are more volatile than bonds. As the stock market swings up and down, stocks tend to consistently fluctuate – which may be emotionally challenging to deal with.
- Stocks have the possibility to lose money if a company fails or struggles financially.
- Bonds can lose value if the bond is sold before its maturity date.
Open a brokerage account with a financial institution such as Fidelity or Charles Shwab to get started with stocks and bonds. Once your account is active, you can go online to research industries, companies and market trends. Then, you can select stocks and bonds for your portfolio based on your risk tolerance.
Mutual Funds and Dividends
A mutual fund is a professionally managed portfolio that pools money from many investors and invests those funds in stocks, bonds and other securities.
There are four main types of mutual funds: money market funds, bond funds, stock funds and target date funds.
Mutual funds often pay out dividends on stocks, or interest on bonds, to shareholders when companies have profits – typically on a quarterly or bi-annual basis.
- The mutual fund invests in many different securities through diversification, which reduces overall portfolio risk.
- Dividends and interest income earned on the mutual fund can be reinvested to purchase additional shares in the mutual fund, thereby growing your investments further.
- Mutual funds are managed by professionally trained and experienced fund managers.
- A low minimum investment is required, ranging between $500 to $3,000.
- Most mutual funds offer liquidity; you can sell immediately and get out of a mutual fund.
- Certain tax implications may result from capital gain payouts in mutual funds since you have no control over when you receive distributions.
- Some mutual funds may have a locked-in clause that normally lasts 3 years. This clause will charge you fees if you decide to take your money out early.
- High costs such as management fees, distribution costs and expenses may cut into your profits over time.
To get started with mutual funds, you can access them in a workplace 401(k) or open an IRA. You typically need a minimum of $500 to invest in mutual funds, although some have no minimum requirement.
It is best to research brokers that offer low management fees and no transaction fees. Simply research different mutual fund performances to determine which ones you want to add to your portfolio.
Remember, mutual funds are traded only once per day at the closing net asset value (NAV).
Real Estate Investment Trusts (REITs)
REITs, or real estate investment trusts, are companies that own, operate or finance income-producing properties in various sectors. They include real estates such as shopping malls, office buildings, storage facilities, apartments, hotels, warehouses and mortgage loans.
Investing in REITs gives you the opportunity to add real estate to your portfolio without having to personally own or manage property.
- REITs allow you to diversify your portfolio – which minimizes your risk.
- They offer better return potential, with high dividends and capital appreciation.
- REITs are usually less stressful than owning physical property.
- Most REITs don’t require a minimal amount to invest and offer lower transactional costs.
- Fluctuations in the real estate market may affect performance.
- Dividend distributions may be subject to higher taxes at the investor’s regular income tax rates.
- There is a potential for high fees and risks.
- REITs sensitivity to interest rates – based on the Treasury yield – affects their value.
To invest in REITs, you can purchase shares of REIT stocks, mutual funds, or exchange-traded funds through your brokerage account or your workplace retirement plan.
Be sure to do your research on REIT corporations. Favor REITs that have a positive track record and offer high-yield dividends.
Annuities
An annuity is a contract between you and an insurance company that provides a guaranteed stream of income throughout retirement. There are three main types of annuities: fixed, variable and indexed.
A fixed annuity guarantees a specific rate of return based on your contributions for a set period of time.
A variable annuity increases and decreases in value based on the performance of financial markets.
A fixed-indexed annuity offers a fixed interest rate on your return for a specific period of time based on the performance of the stock market indexes, such as the S&P 500 or Nasdaq.
- An annuity investment grows on a tax-deferred basis.
- They provide guaranteed income.
- They offer the potential for higher returns when markets don't perform well.
- Some annuities have the ability to customize contract features.
- Annuities can be very complex.
- They can have high fees and expenses.
- You have limited access to your money.
- With annuities, there is some investment risk as the insurer could possibly default.
If you are interested in buying an annuity, begin researching annuity providers to choose the right type of annuity and contract terms you’re comfortable with. Complete and submit an application to the annuity provider for approval and funding.
Learn More About Your Annuity Options
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Long-Term Care Insurance
Long-term care insurance is an insurance policy that helps cover nursing home care, assisted living and home health care long-term services for a person living with a chronic medical condition or acute disability.
A long-term care insurance policy can reimburse individuals a daily, pre-determined amount for services to assist them with activities of daily living – such as bathing, dressing or eating.
- The option of in-home care allows you to remain in the comfort of your own home.
- Long-term care insurance premiums may be tax deductible if your medical expenses are greater than 7.5% of your adjusted gross income. In 2023, those over 60 years old but under 70 may be able to deduct up to $4,770 per spouse. If you are over 70, you may deduct up to $5,960 per spouse in premiums as medical expenses.
- LTC insurance can be beneficial if you know you will use it in the long run since out-of-pocket costs are expensive.
- It offers peace of mind that you and your family will not be financially overburdened and that you’ll receive professional care.
- The premiums are not guaranteed and can increase.
- You may not qualify if you have preexisting health conditions.
- If you need LTC, you must meet rigorous requirements for the insurance company to pay out the benefits.
- If you never need to use your LTC insurance policy, you won’t benefit from all the money you paid into it.
You can buy a long-term care insurance policy through an insurer that offers this type of insurance. Research different insurance companies online and fill out an application answering health questions.
There are no age requirements to purchase long-term care insurance, but the most cost-effective time to buy is suggested between the ages of 50 and 65, according to Charles Schwab.
Permanent Life Insurance
Permanent life insurance is an insurance policy that offers financial security to your loved ones for a lifetime. There are two main types of permanent life insurance policies: whole and universal.
In a whole life insurance policy, premiums stay the same for the life of the policy and the cash value growth and death benefit are guaranteed.
In a universal policy, the premiums, cash value growth and death benefits will vary based on certain circumstances.
Both policies accumulate cash value over time that you can borrow against.
- Your policy comes with a cash value you can borrow from during your lifetime.
- Your coverage lasts a lifetime, as long as you pay your premiums.
- There are several options based on your risk level, budget and financial goals.
- The cash value component grows tax deferred.
- A medical exam may be required, depending on your insurer.
- Permanent life insurance typically costs more than term life insurance.
- Your beneficiaries will receive a lesser death benefit if there is an outstanding loan balance.
- Some forms of permanent life insurance require regular monitoring, like variable life insurance.
You can buy a permanent insurance policy through an insurance company. An online search is recommended to compare the different product offerings. You can fill out an application to apply.
Keep in mind some insurance companies don’t require a medical exam.
High-Yield Savings Accounts
A high-yield savings account is a type of savings account that pays a higher interest rate on deposited funds compared to a traditional savings account.
High-yield savings accounts with the best offers are typically provided by online banks. These types of accounts allow you to grow your money faster.
- High-yield savings accounts have higher interest rates than a standard savings account.
- They are considered a safe investment with no risk.
- A low minimum investment is required to open an account.
- Your funds can be easily moved to other accounts.
- Your savings account is insured by the FDIC up to $250,000.
- The interest rates can change at any time.
- They are mostly offered by online banks without physical locations.
- They aren’t considered a solution for long-term wealth growth.
- Withdrawals may require extra effort.
- Withdrawals on savings accounts are limited to six monthly withdrawals or penalties may incur.
To open a high-yield savings account, do an online search of financial institutions that offer this type of account. Compare interest rates offers, APY and terms. Once you select the financial institution which offers the most competitive rates, you can apply for an account.
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Maximizing Home Sale Proceeds
Based on data collected by the National Association of Realtors (NAR) in a 2022 Profile of Home Buyers and Sellers report, buyers typically purchased their home for 100% of the seller’s asking price, with 28% purchasing for more than the asking price.
According to Homelight, the key to positioning your home to generate the most return is to do preliminary research and understand local market trends. This will help you develop a competitive house pricing strategy.
In addition, consider certain elements that can help you achieve maximum fair market value for your home.
- Increase your home’s curb appeal.
- Stage your home.
- Determine any necessary repairs and upgrades.
- Determine the right price for your home.
- Consider which season to sell (e.g. spring or summer).
Before selling your home, consider other factors to ensure you are utilizing your proceeds wisely.
For example, think about using the money to pay down any outstanding debts so you will have less stress in retirement.
You may also want to consider rebalancing your portfolio to adjust the weight of different asset classes.
In addition, understanding the tax implications of your home sale and how to benefit from exclusions can help you retain your proceeds.
- Pay Down Debt
- Diversification
- Asset Allocation
- Rebalancing
- Tax Implications
Frequently Asked Questions About Home Sale Proceeds
Your home sale proceeds can be affected by additional expenses and fees related to selling your house, the conditions of your property, tax implications of total gross income and capital gains tax. In addition, you might be affected by any consequences or costs of moving and renting or purchasing a new home.
If you decide selling your home isn’t for you, there are alternatives to supplement your retirement income. Homeowners 62 or older might qualify for a reverse mortgage.
A reverse mortgage allows you to borrow money against the equity you have in your home. However, reverse mortgages can be risky as they require you to pay the lender the additional debt with interest, and it uses up your equity.
Another option you may have if you have a lot of equity in your home is to borrow money through a home equity line of credit.
A home equity line of credit is a second mortgage that gives you a revolving line of credit to use for large purchases. You typically make interest-only payments first during the draw period. When the repayment period begins both principal and interest payments must be made on the loan.
You can use your home sale proceeds to plan for retirement by investing those proceeds in other money-maximizing investments. Or, you can put the money into an annuity or permanent life insurance policy with a cash value to supplement your retirement income.
The tax implications on your home sale proceeds are based on the IRS primary residence exclusion rules. If you sell your main home for a gain, you may be able to exclude up to $250,000 ($500,000 for married filing jointly couples) and avoid paying taxes on that income.
To qualify for this exclusion, certain conditions must be met within an eligibility test based on ownership and residence. You must own the home for at least two of the last five years before the sale and you must have lived there for two of the last five years before the sale.
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13 Cited Research Articles
- FINRA (2023, May 24). Investment Products: Annuities. Retrieved from https://www.finra.org/investors/investing/investment-products/annuities
- Kalfrin, V. and Rogacz, C. (2023, Jan 31). 6 Go-To House Pricing Strategies Used to Sell Real Estate. Retrieved from https://www.homelight.com/blog/house-pricing-strategies/
- Investor.gov: U.S. Securities and Exchange Commission. (2023) Mutual Funds? Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1
- Investor.gov: U.S. Securities Exchange Commission (2023). Real Estate Investment Trusts (REITs) Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
- Internal Revenue Service. (2022, Dec 28). Publication 523, Selling Your Home (2022). Retrieved from https://www.irs.gov/publications/p523
- National Association of Realtors. (2022, November) 2022 Profile of Home Buyers and Sellers. Page 7. Retrieved from https://www.nar.realtor/sites/default/files/documents/2022-highlights-from-the-profile-of-home-buyers-and-sellers-report-11-03-2022_0.pdf
- Federal Trade Commission Consumer Advice. (2022, August). Reverse Mortgages. Retrieved from https://consumer.ftc.gov/articles/reverse-mortgages
- Guardian Life. (2022). Permanent Life Insurance: What It Is and How It Works. Retrieved from https://www.guardianlife.com/life-insurance/permanent
- Gentle, S. (2021, Dec 28) Should You Consider Investing in REITs? 10 Pros and Cons. Retrieved from https://www.onrec.com/news/news-archive/should-you-consider-investing-in-reits-10-pros-and-cons
- Schwab-Pomerantz, C. (2021, Mar 11). Should You Purchase Long-Term Care Insurance? Retrieved from https://www.schwab.com/learn/story/should-you-purchase-long-term-care-insurance
- Ameriprise Financial. (2020). Investing in Stocks and Bonds. Retrieved from https://www.ameriprise.com/financial-goals-priorities/investing/stocks-and-bonds
- Johnson, R. (2018, Nov. 17) PocketSense: Why Bonds Are Safer Than Stock. Retrieved from https://pocketsense.com/bonds-safer-stock-5558.html
- Internal Revenue Service. (n.d.). Rev. Proc. 2022-38. Retrieved from https://www.irs.gov/pub/irs-drop/rp-22-38.pdf
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