Retired widow, 54, to sell properties, generate income

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Carrie, 54, is a young widow who retired last summer.

She has substantial retirement assets and several rental properties that add to her net worth.

Carrie is ready to unload them, and her primary residence, too.

“I want to sell my home and rental properties in New Jersey and buy a home in Pennsylvania,” she said. “I want to invest wisely and limit taxes.”

Carrie has annuities and mutual funds worth more than $2 million, IRAs worth $24,700, $141,000 in a brokerage account and $71,000 in checking accounts. The properties she wants to sell are worth $500,000, and her home is valued at $300,000. She also has a rental property in Florida that she plans to keep.

Adding to her financial security is a $38,000 annual pension.

Lisa McKnight, a certified financial planner with Lassus Wherley in New Providence, reviewed Carrie’s finances for

McKnight made some assumptions for Carrie’s plan, including that Carrie would sell the rental properties for the current market value less selling costs of 5 percent. Those proceeds would be used to purchase a new home for $400,000 with buying costs of 5 percent.

“With the sale of the rental properties in 2016, the makeup of Carrie’s total income shifts from rental income to investment income,” McKnight said. “Since it will be necessary to generate investment income for cash flow needs, it is important that portfolio assets be invested in a diversified, low cost portfolio that generates long term growth and income.”


McKnight said she assumed the total proceeds from the rental homes and Carrie’s primary home to be approximately $775,200, from which approximately $420,000 will be used to purchase a new home in Pennsylvania.

The remaining $355,200 would be invested in a taxable account.

“Since the properties were inherited from her late husband, the cost basis on all three will be the market value at his date of death,” McKnight said. “Total capital gains incurred by the sale of the rental properties may be approximately $214,000, resulting in a capital gains tax of approximately $26,000.”

McKnight said two factors that may alter this figure: any carryover passive losses Carrie incurred  that were previously disallowed can be claimed in the year of sale, and any depreciation expense taken against the rental income would have to be added back as ordinary income.

“As the homeowner, there is no capital gain on the sale of your primary home since it gets an exclusion as your primary residence,” McKnight said, noting Carrie should work with her tax preparer on that.

Carrie has considered offering a seller-financed mortgage to potential buyers.

She would act as the mortgage lender, providing financing to prospective buyers of the properties in order to facilitate and expedite the sales.

With that in mind, McKnight said she modeled a scenario where both rental properties are sold in 2016 with a 10 percent down payment and the remainder was financed for 15 years at a 5 percent interest rate.

The first rental property would have a note receivable of $275,400, generating $2,178 per month. The second would incur a note receivable of $183,600 and generate $1,452 per month.

“The monthly income generated from the note receivables closely matches the rental income the properties had been generating,” McKnight said.

There are positives and negatives to offering seller financing.

The pros? Carrie might be able to sell the properties faster, and she’d hold the mortgage and the title to the properties.

She could also charge a higher-than-average mortgage interest rate, with current 15-year fixed loans averaging 2.75 to 3 percent a year.

Plus, the move could generate a steady income stream.

But the items in the “cons” column are not small ones.

First, she’d need legal representation to draw up clearly specified terms and contracts.

There would be liquidity risk, McKnight said, as it may be difficult to cash out of the mortgage investment if Carrie changes her mind in the future.

There’s also the risk of default, and legal expense to handle a foreclosure.

“Although interest received may be higher then what can be attained from a bank, over the long term it may be less then returns from an investment portfolio, where she could receive growth plus income,” she said.

And finally, Carrie would be liable for the capital gains tax in the year of sale.

If you opt for a seller-financed mortgage, McKnight said, it’s important to get as large a down payment as possible and to have an attorney draw up the legal documents.

“Our analysis reflected little differences to cash flow and net worth long term between selling the properties outright versus holding a seller financed mortgage,” McKnight said. “Selling the properties outright gives an immediate boost to the investment portfolio and investment income while holding a seller-financed mortgage provides a steady stream of income versus relying on investment income for cash flow needs.”


Carrie will need to draw from her investments for her cash flow needs. She needs to balance that with her anticipated Social Security income.

At age 60, Carrie can begin collecting her Social Security widow benefit of approximately $1,342 per month, which will help supplement her cash flow and somewhat alleviate the dependency on investment income. McKnight said. At age 70, Carrie should switch to her own Social Security benefit which benefited from delayed retirement credits and annual COLA increases.

But Carrie will still need funds from her investments.

McKnight said she assumed a 5 percent rate of return on Carrie’s investment portfolio, but the range could fluctuate depending on risk tolerance, investment choices and expenses. The proceeds from the sale of the properties in 2016 would add to her investments, and income from investments will become a key source of income to satisfy cash flow needs, she said.

Assuming steady expense levels and a 5 percent rate of return, assets appear to last through Carrie’s retirement to her age 100 in 2061. By then, McKnight said, appears that net worth may be in excess of $2.7 million.

McKnight ran an additional scenario illustrating the same assumptions, but decreasing the rate of return to 3.5 percent, which would just be enough to keep pace with inflation.

“At 3.5 percent it appears that Carrie’s financial viability may continue to be sound with a possible net worth at age 100 of $2.6 million,” McKnight said. “It is important to keep in mind that changes to her lifestyle and expense levels can impact the outcome.”

Still, she needs to make sure inflation doesn’t eat away at her purchasing power.

Carrie says she’s a conservative investor, and her current investment portfolio has 35.9 percent in U.S. large-caps, 6.43 percent in U.S. small-and mid-caps, 6.37 percent in international equities, 1.55 percent in emerging markets, 19.48 percent in global equities, 25.75 in U.S. fixed income and bonds, 3.03 percent in global bonds and 1.48 percent in cash.

Although diversified, this allocation does not correspond with Carrie’s conservative risk tolerance.

To get closer to her tolerance, McKnight suggests Carrie increase U.S. fixed income and bonds to 35 percent.

And, McKnight said, there are redundancies in Carrie’s portfolio holdings in U.S. equities, international equities and global equities and with U.S. bonds and global bonds, too.

“The redundancies are most likely caused by having her assets scattered at various institutions,” McKnight said.

McKnight said Carrie’s portfolio needs to be structured so that it continues to grow and generates the income that she will need to cover her cash flow.

Carrie’s current portfolio is spread among many different institutions and products. Many of her mutual funds have high costs and fees that reduce her returns and income. The annuities also have high fees, negative tax implications (income is taxed at ordinary rate) and are illiquid.

“It is recommended that she work with a fee-only financial planner that can consolidate her investments, eliminate the redundant holdings, reduce investment expenses and keep her portfolio balanced and on track,” McKnight said. “Lastly, Carrie should give consideration to estate planning to ensure her assets are passed according to her wishes in the most tax efficient way possible and to plan to incapacity.”

This story was first posted in November 2015.

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Net Worth:


[list type=”icon” style=”none” icon=”angle-right”]

  • Checking: $47,000
  • Business Checking: $24,000
  • IRAs: $24,700
  • Annuities: $1,097,000
  • Brokerage: $141,000
  • Mutual Funds: $1,116,000
  • Primary Home: $300,000
  • Rental Property #1: $300,000
  • Rental Property #2: $200,000
  • Rental Property #3: $125,000
  • Personal Property: $100,000
  • Autos: $20,000
Total Assets: $3,494,700


  • none
Total Liabilities: $0
Total Net Worth: $3,494,700


Annual Income:

  • Pension: $38,000
  • Rental income: $60,000

Monthly Expenses:

  • Income Taxes: $2,216
  • Housing: $525
  • Rental properties: $1,700
  • Utilities: $675
  • Food: $800
  • Personal Care: $300
  • Transportation: $200
  • Medical: $20
  • Entertainment: $125
  • Charity: $400
  • Gifts: $250
  • Pet Care: $200