Q&A with Gordon Pape: Investing Home Sale Proceeds

A couple is seeking a risk-free way to earn five per cent annually.

Q: My wife and I are set to retire in 18 months. We have just purchased a condo for $346,000. Our current home is fairly modest and is likely to net us $310,000.

The mortgage we’ve secured is at 3.2 per cent. It would seem wise to use the proceeds from the sale of our home to generate income by way of dividends. In effect, it seems to make sense to not rush to pay off the new mortgage, given that there are opportunities to earn 5 per cent interest on this money.

Does this seem logical and, if so, what investments might you recommend we consider which might be conservative enough to generate the 5 per cent while not putting our capital at risk? — Dave K.

A: My advice is to approach this idea very cautiously. You are both very close to retirement. Unless you have gold-plated pensions, you may need the proceeds from your house sale either to generate income or to reduce the carrying costs on the mortgage.

You ask about earning 5 per cent on your money without putting your capital at risk. That’s impossible in today’s environment. Any investment that would potentially produce that return has some risk attached to it. If anyone tells you otherwise, they’re either misinformed or trying to sell you something.

In order to generate a 5 per cent annual profit you would have to invest in a stock portfolio or in mutual funds that focus on the market. There are some low-risk funds out there but none that are risk free. One example is the Sentry U.S. Monthly Income Fund, which gained 6.49 per cent in the year to Aug. 31. The company rates the risk level as low/medium and so far the fund’s worst 12 month period was a loss of 0.66 per cent in the year ending Feb. 29, 2016. But that’s not to say it couldn’t drop more in a crash because almost half the assets are exposed to the stock market.

You have to decide whether you want to accept that level of risk. If not, lower your sights and consider a GIC from a small financial institution. A few are paying up to 2.5 per cent for a five-year term.

Two more tips that will save you tax on any income earned. First, both of you should maximize your Tax-Free Savings Accounts, if you have not done so already. Second, you should use the proceeds from the house sale to pay off the condo mortgage. Then take a home equity line of credit on the condo and use the money from that to invest. — G.P.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.

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