Dear @financial_laura,
I can’t believe this, but I just won $1 million in the lottery! Now reality is setting in and I don’t know what to do with it – can you help?
Wait! Before you stop reading because you know the odds of winning the lottery are around 1 in 28.6 million* this situation might still apply to you.
I have been approached a few times by people who have a sudden windfall of income that they were not expecting:
- an inheritance;
- large capital gain from the sale of a property (cottage, or house);
- the commuted value of a pension upon a job change; or
- a large bonus at work.
The overarching theme here is what to do with a sum of money that is not needed for day-to-day expenses, but is also not enough to retire immediately.
What would you do with $1 million??
I love asking this question in a preliminary money discussion because the answer is often very telling about a person’s spending habits.
Take a minute and reflect on what you would do with a million. Are you suddenly in one of the lottery commercials? New cars, cottages, donate to charity, support your family, etc., etc. Or basically, spend, spend, spend.
A great quote from a book I’ve been reading:
“Most people, given more money, only get into more debt.” – Rich Dad Poor Dad by Robert Kiyosaki
So what’s the right answer?
Step 1: Use the money to purchase an asset which will generate income for you in perpetuity.
Step 2: Spend the (after tax) income on your dreams
Yes, this means delayed gratification, but over a lifetime you will be financially empowered because you have control over a large asset and you have invested for your future.
The asset that you choose will depend on your risk profile and is a personal decision. However, here are a few examples:
- Purchase stocks and bonds and earn interest, dividends and capital gains
- Buy a rental property (or two?) and enjoy earning rental income
- If you’re approaching retirement an annuity bought at age 50 for $1M will provide approximately $38,341 annually after tax (Sun Life calculator)
Purely as an example, let’s look at what could happen if the full $1M was invested in the Conservative couch potato ETF portfolio. This portfolio is made up of only three ETFs to keep costs low, but offers superior diversification while being heavily weighted in bonds for a conservative approach.
Historically (which is no guarantee of future performance), this portfolio has returned 5.41% on an annualized basis over the last 10 years (which includes the downturn of 2008). This would mean an annual after-tax income of $34,617 in both dividends and capital gains…annually…for life!
These tips are transferable to your RRSP and retirement planning as well. Do you know if you will have enough to generate sufficient income in retirement? Let’s chat!
*According to the Ontario Lottery and Gaming Corporation
This article was first published on my blog at www.journeyfinancial.ca