Q: I am 52 years old, divorced, and would like to retire in 10 years. I would like to own my own home.
In order to afford a house payment I will need to stay in the $200,000 price range. I figure I would need to sell approximately $60,000 in stocks for the down payment on a house in order to be able to afford the monthly payment. I have $300,000 in investments (stocks and bonds) and would liquidate some of those stocks in order to afford the down payment.
Do you think I should sell off that amount of stock to invest in real estate? Will it delay my retirement plans?
A: I think owning a house is a good idea, but the question you have to ask yourself is where do you want to live in retirement and what kind of cash flow will you have?
If you take the $60,000 and buy a house, and the house appreciates in value at a rate of 5 percent per year, you’re doing better on that investment than if you earn 8 percent in the stock market.
Why? You’re earning 5 percent on $200,000, which is about $10,000 in the first year. You get to keep the profits tax-free when you sell (up to $250,000 if you’re single, up to $500,000 if you’re married) and, if you itemize on your federal income tax return, you write off the interest and real estate taxes you pay.
If you earn 8 percent per year on your $60,000 in stocks, that’s $4,800 per year. When you sell the stock, assuming you’ve held the investment for at least a year and it is not being held in a retirement account, you’ll pay a maximum of 15 percent in capital gains tax.
While the mortgage, taxes, insurance and upkeep will cost perhaps slightly more than you’ll pay in rent, part of what you’re doing is building up equity in your home. So in addition to your property appreciation, youâ€™re adding to your savings.
And, you have to live somewhere, so it is not as if you can say the choice is buying or not buying. You’re going to buy or rent.
What you might want to do, however, is sit down with a fee-only financial planner to discuss your portfolio and figure out which would be the best stocks to sell. You can also work out how much delayed, if at all, your retirement plans will be.