How should you invest $1 million you’ve just inherited or worked towards?
Today we are talking about investing $1 million. Let’s take a look at a couple of different case studies.
Hypothetically, let’s pretend you’re young, in your 20s or 30s and you just inherited $1 million. This is all non-registered after tax money. How should you invest that million dollars?
The first step to take is to figure out your investment horizon as well as your risk tolerance.
In your late twenties, with $1 million dollars, you’re probably not retiring. Or if you are retiring, you’ll really need to factor in that income stream for life is only expected to be about $50,000 according to the CFP planning institute.
Generally speaking, you could use a 4% or 5% as an income stream in perpetuity, on a dollar figure such as that, which means you’d be getting that income to sustain your lifestyle.
If you’re still going to be working, then you have to factor in your long-term investment horizon and your risk tolerance. This is what your portfolio will be built around.
You could potentially own some Canadian dividend paying stocks, which are tax efficient.
You can own some US companies, maybe some growth stocks in there, and a few global companies as well.
You should definitely own some tax efficient investments because this is going to be taxable income for you.
If you continue to earn your income, this is going to be taxable income. We want to focus on any investment streams that pay either a return of capital or that convert something to a capital gain such as real estate investment trusts or anything infrastructure wise.
Dividends and their return of capital, are very, very good when it comes to that portfolio. Now you’re working, and you’ve got your million dollars; it’s going to be tax efficient and over time you’re expecting to get that growth.
The idea is that when you do reach the number that you’re comfortable with, whether it’s 2 million or 3 million or 4 million, you can decide if you want to stop working and focus on other things.
Maybe you’re in your late forties, early fifties, and you’ve sold your business – now you’ve got 1 million bucks and you’re deciding what to do.
You’ve got your million bucks, yet you’re still not quite comfortable enough to retire. The question becomes, “Now what am I going to do with this money?”
Well, you should take a look at your RRSP and your TFSA contribution rooms. Do you have kids? Do you want to max out the RESP for the education savings grant?
That chunk you will want to maximize every grant you can get from the government, every tax efficient pot of money that you can invest and every dollar that you can get back in the form of a contribution to an RRSP.
Those three things you’ll definitely want to consider and make sure you factor those in, maximize them, and continue to build on that over time.
If you’re in the same situation as the 20 to late 20-year-old in that you’re still working, you’re going to have to factor in the tax consequence as well.
If you’ve accumulated a bunch of wealth and this new million dollars is going to be added to your pot for retirement, well, then you can begin some holistic planning. Maybe now you’ve got 2 to 3 million and you can pull the plug and retire early.
Or maybe you can start traveling. Maybe you can slow down at work. Those are all factors to consider and you must take into account your investment horizon in that case.
Let’s take a look at a retiree, someone who’s maybe received their pension through a lump sum.
It’s possibly a million-dollar pension that they received through a defined contribution pension that’s been converted to a LIRA, or perhaps it, perhaps it’s an inheritance or maybe even the sale of farmland or something like that.
Regardless, you’re a retiree and you’ve got your million dollars.
Now it’s very important to structure a portfolio that will generate tax efficient income for you now and into retirement.
You will need to make sure that you’re looking at all the investment opportunities that are paying consistent cash flow, whether it’s private debt, or private equity through real estate holdings. And maybe it’s some nice bonds. Maybe it’s some preferred shares that pay a dividend tax credit.
In any event, you’ll want to make sure that you have tax efficient income that’s being generated now because you will be drawing on that income.