Sell house, live off proceeds
I am considering selling my house and trying to (mostly) live off the proceeds. I have considered the additional costs (eg: rent) and savings (eg: property taxes). Boiling it down to this - how should I invest $500K to generate a "safe" cash flow of 4-5% per year (before taxes, and inflation adjusted) and while minimizing taxes? I am willing to slowly draw down the capital while doing so. I have heard of investment vehicles such as Mackenzie's Sentinel Canadian Short-Term Yield Class, which allows one to draw monthly income and defer taxes. I do also have Capital Losses from previous years so this could offset some Capital gains. Your thoughts please and thanks!
What's your age, do you have dependants or a significant other to support, assets/liabilities, required monthly income from assets/budgeted monthly costs, and do you have other income coming in monthly? CMFers will need more info before responding appropriately
Last edited by Young&Ambitious; 2012-08-21 at 01:40 PM.
Reason: Spelling error
How long you figure the money needs to last, what do you think inflation rates are going to do over that period, how much money do you want to withdraw each year, how confident are you in the answers you are providing, and how much money management experience do you have?
Is this another one-hit wonder?
You know it! I was going to respond with my standard one-hit wonder reply, but I decided against it.
500k is not enough unless you want to gamble and buy some high risk stocks which yield 10%+... at 5% you'll get 2083$ a month, it's actually doable if you want to rent out shitty apartment, not have a car and no going out
Or one can become a hermit and move to the mountains and live off the land. Squirrel anyone?
In the spirit of discussion. How much do you need per month to survive? Assuming $5000 per month, hence $60000 per year
60000/500000 = 0.12 = 12%
Assuming average premium of 3%/month for writing options. You need 4 months of correctly writing options to survive, that's 4/12 months per year i.e. 33% of the months
Assuming also that you are good at assessing risk, options expires worthless 80% of the time. Therefore what are the chances of you being able to survive on 500 000 every year?
1 - (20% * 33%) = 93.4% chance
Assuming that you are age ~35. (for a 500 000 net profit you must've held from at least year 2003 till now. Which means that you must've been working at year 2003 when one of the bubble cities have on sale houses for ~250K and is now 750k. From here on to retirement you have 25 years.
Compound potential of survival is 93.4% ^ 25 = 18% probability that you can live till retirement with $500 000. Hope this answers your question.
Originally Posted by Causalien
Thank you all for your replies, questions, and advice!!
I am actually asking about something with a very specific focus. My current assets are just over 1M CAD$ consisting mainly of house (~500k), RRSP (350K), GICs (165k, joint with mother), cash ($30k), plus other assets from parent's inheritance (88yrs old). So I don't sense that I will have an issue with full or partial retirement at this point (I'm 56 yrs old). I want to preserve and grow the RRSP for as long as possible, and because the GICs are joint don't plan to liquidate or reinvest those yet. So my question is essentially how to invest just the $500k from the house to generate "predictable" monthly cashflow and minimize taxes and commissions. Yes I fully realize that @4-5% ROC it will not cover my living expenses, including rent (~1200/mo), just offset it somewhat preserving as much of the capital as possible. Perhaps a diversified portfolio of REIT(s), ETFs, govt bonds.
So I think my question boils down to, what would you do to make $500K outside RRSP work as hard and safely as possible these days?
PS: I also plan to apply for CPP at 60, so that will help a bit also.
Edit: sorry, I missed the "and inflation adjusted" -- all of the below is to try to hit 4-5% nominal.
Well, how predictable does the cashflow have to be? If that is a big criteria, then focusing on investments that pay out a regular yield is probably the way to go: so some mix of dividend stocks, REITs, preferred shares, and bonds. I'll assume for now that you don't want to build an active portfolio with individual names, and instead are looking for ETFs.
For dividend stocks: CDZ yields 4%.
REITs: ZRE yields 5%.
Preferred shares: CPD yields 5%.
Bonds: XSB yields 1.6% to maturity.
You can tinker with this basic set of funds of course, and there are many offerings that are more-or-less similar, but this is a decent sampling of what your options are in Canada. Exclusively looking here would leave you under-diversified globally, but for tax efficiency focusing on Canada may be the way to go.
So, you don't say what your RRSP is in, but let's assume it's 50% in fixed income, so combined with your $195k in cash and GICs, that's about $370k of your $1045k of assets. If overall you want to be roughly 40% in fixed income, then about $50k of your $500k should be in bonds (and depending on the flexibility of your definition, some preferreds). Then it's just a matter of deciding how to split the remaining amount. An equal split is simple, and I don't think a terrible way to go. So that would give you a portfolio of:
CDZ: $150k, throwing off $6k/yr in mostly eligible dividends.
ZRE: $150k, throwing off $7.5k/yr in a mix of return of capital, dividends, and other income.
CPD: $150k, throwing off $7.5k/yr mostly in eligible dividends.
XSB: $50k, throwing off $1.25k in interest and $0.45k in capital losses.
That's an average pre-tax pre-inflation return of about 4.3%, which should be fairly sustainable. CDZ may give a small capital gain, but that would be about it for expected returns. In going with this kind of strategy over a more traditional passive portfolio of broad indexes, IMHO, you're getting a more stable monthly/quarterly stream of income with a lower chance of long-term capital appreciation, and increasing your home country bias (there are US dividend ETFs, but come with currency exchange issues and may not be as tax efficient as a Canadian eligible dividend).
Last edited by Potato; 2012-08-27 at 03:39 PM.