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Need to learn where to invest substantial proceeds after downsizing from a California house we bought new 21 years ago, to a smaller California house.

Should I stick with mutual funds for income and equity, and money markets or very short term bond funds for cash?

Should I pay off present 30-year-old house mortgage from said proceeds? (present house 80% financed at 4.25%) or refi to a lower rate and assume income investments will always cover monthly mortgage (sounds risky)? House is near Sacramento where values are increasing.

Goals:

* Protect existing IRA investment and the downsize proceeds    
* Beat inflation     
* Increase investments    
* Re-invest all dividends and interest and yields until I'm 70  
* Be financially independent at 70 

DETAILS...
Have been using fixed percentage asset allocation model for IRA's over the last couple decades: Fixed % for equity growth, for income generation, and for cash.

Paid off mortgage of first house.

I'm 63, healthy, still enjoyably working full time. Planning to start social security at 70.

Spouse retired and in good health.

  • Have you set aside enough money to pay any taxes on the sale of the first property? Does the remaining money pay off the entire mortgage on the new house? – mhoran_psprep Sep 4 at 12:07
  • Yes. Yes. Paying off mortgage means having no debt. I like that. Making money with borrowed money by investing in stocks and bonds feels risky. – Doug Null Sep 5 at 23:25
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Should I pay off present 30-year-old house mortgage from said proceeds?

That seems like the best thing to do. It's a mostly inflation save investment and fairly low risk at a pre-tax return rate of 4.25%. That's hard to beat at the moment.

The current investment picture isn't pretty. Many researchers project the 10 year real rate of returns for US large stocks to be below 1%. That's at least positive: Projected real returns for bonds are negative across the board. "Negative" means that the returns are below inflation.

We don't live in "normal" times: the stock market is heavily overvalued, outlook for bonds is grim, the economy takes a beating and the pandemic is far from being over. Real estate seems to be a reasonable alternative.

Social Security picture is also not great. The pandemic has accelerated the depletion of the trust funds and studies put the "out of money date" between 5-15 years from today (see for example https://www.marketwatch.com/story/how-has-covid-19-impacted-social-security-and-will-it-ever-recover-2020-07-24) That doesn't mean it's going to stop paying, but a reduction of benefits in the not too distant future is not unlikely.

Given that background, paying off the mortgage seems like a good idea. That will likely result in significant extra money in your pocket every month since you don't have to pay the mortgage anymore. You probably want to save some of this too, but you can do this with dollar cost averaging which is less risky than a lump-sum buy.

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    "Many researchers project the 10 year real rate of returns for US large stocks to be below 1%" High amount of conjecture in this statement. – Grade 'Eh' Bacon Sep 10 at 1:46
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So, far we are planning to do fixed % asset allocation, with 60% stock equity, 40% income (bonds), and enough cash for 1yr. Stocks will be subdivided into 60% U.S. and 40% foreign. Bonds will be 70% U.S. and 30% currency hedged foreign. ...all mutual funds, except for perhaps a fixed % of the U.S. stock assets being individual stocks, not mutual funds.

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The question is a tragic reminder that we now live "in a world of no returns".

Stocks, bonds, everything, pay nothing. There are no investments. You can no longer "live off" capital.

It's a bit off the wall but have you considered some sort of simple small business, such as a small franchize?

I have an acquaintance, X, in a similar age category / situation to the OP's description. X and wife bought a little sno-cone trailer setup (cost about 20k) and had fun operating it at school football games and the like a few afternoons a week.

If anyone sneers at the income from a snocone trailer, that is very naive. They could easily pick up 500-1000 bucks a week, and that's cash.

(If anyone knows any way to invest even a million bucks and pick up 30, 40 thousand a year in income from the investment, pls. tell me now :/ )

Plus it was enjoyable for the couple, etc.

Of course, it's incredibly difficult to pick a franchize or business that is a winner, but at least the risk can be low.

(If you're thinking a coffee shop or such, as always in business, it's better to buy an existing (ideally troubled) one, than start from scratch.)

So, one possibility to actually get some dollars rolling in, is consider a small business or small franchize situation, from this capital.

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    I'm not sure I'd call starting a small business during a pandemic "low-risk", even if it's a relatively small investment. Also, it's not compatible with full-time work unless you hire somebody up operate it, which would reduce your earnings... – 0xFEE1DEAD Sep 4 at 20:38
  • howdy @0xFEE1DEAD ... hmm, say you have $1m cash. You put it in any sort of market related fund or product, it would be completely and totally commonplace that you lose 20 or 30 thousand. In contrast, if you spend 20 or 30 thousand of the $1m on the right sort of small business equipment or capital item, it's all-but impossible you will absolutely lose every penny of that 2% of your capital. Arithmetically, I can't see any way to describe it as anything but the lowest possible risk? – Fattie Sep 5 at 15:22
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    @Fattie Not sure your comparison is apples to apples. You say that a 30k investment is unlikely to lose everything, but a $1M investment in equity is quite possible to lose 30k. The fair comparison would be - how likely is a $1M investment in a small business likely to lose 30k? – Grade 'Eh' Bacon Sep 10 at 1:48

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