I got this question in my inbox lately.
How would you manage one million dollars?
The questions and assumptions from the reader went on to say this: let’s assume you are 65, have no company pension, no kids (to make it simple), no debts (no mortgage), and your government CPP (Canada Pension Plan) and OAS (Old Age Security) cover your monthly expenses. You want to use the $1 million to increase your standard of living. Let’s assume you will live to age 88. You don’t have too many needs but you want to have some fun.
- Hire an advisor?
- Do it yourself?
- Keep some money in a passively managed fund or funds?
- Purchase an annuity?
- Buy and hold stocks?
That’s a number of questions to answer. It is a difficult exercise to suggest to anyone, how to manage their money, without knowing a number of factors related to their saving, investing and lifestyle goals. I can’t answer these questions for the reader who sent them to me but I can have some fun with these questions and provide a few answers from my perspective; what my wife and I might do.
First off…if both CPP and OAS payments covered my basic monthly expenses in retirement as the reader mentioned, and I had $1 million accessible to me, I would be laughing all the way to the bank – literally. Based on the loose assumptions above I believe that is easily plenty of money to “have some fun” with as the reader put it. Your mileage may vary. Assuming you have some form of home to rely on (and sell) in your aged years, to pay for elderly care, I believe you could easily spend $40k per year (from this fictional million dollar portfolio) starting at age 65 and never worry about running out of money. Sure, inflation will eat at some of your purchasing power over time but I doubt this will a huge issue for such a wealthy senior.
How would I invest? Would I hire an advisor?
You know that’s an interesting question. How I invest today (via this primary method) could be different from how I invest at age 65, or older. I’m in my asset accumulation years now. So, my focus is on total return today but also building a modest passive income machine whereby I don’t have to rely on capital withdrawals very often to fund expenses. This approach will allow us to “live off dividends” to some extent. I suspect my focus at age 65 will be some capital preservation but also, if I save properly now, it will also include lots of spending as well if not beforehand.
Regarding an advisor, I would be inclined to hire a fee-only financial advisor or use a robo-advisor in the future to help me manage my portfolio. If I maintained some passion (and competence) with investing I will consider remaining a DIY investor as a retiree.
Would I keep the money in some passively managed funds?
Yes. My bias is and will be to own stocks indirectly via passively managed Exchange Traded Funds for the foreseeable future to get exposure to U.S. and international equity markets. I don’t have any bonds in my portfolio now and I don’t intend to own any for the next 10-20 years largely because of this reason.
Would I purchase an annuity?
No. I really don’t see this in our plans since I believe there are other options to manage your assets in retirement. I think the decision to own annuities really comes down to determining how much fixed-income you absolutely need and for how long.
Would I buy and hold stocks?
100%. I’ve been convinced for many years now, companies that have paid dividends for decades or generations will likely keep paying them. You also get some capital appreciation from stocks, which is higher than bonds, which is higher than cash over time. Capital gains are an efficient form of taxation – so selling stocks over time can be a tax strategy.
Although there are some companies in our portfolio that have reduced their dividends this year (examples: HSE, COS) this number is dwarfed by the number of companies we own that have raised their dividends or maintained their dividends over the last seven months. My plan is to buy and hold about 30-40 large-cap dividend paying stocks that will provide cash flow for basic living expenses and index invest everything else. On this path, we’re already 42% towards reaching one of our major early retirement goals.
How would I invest a million dollars?
Probably not much different than the path I’m on trying to grow a million dollar portfolio. This means I would hold a number of Canadian blue-chip stocks that have a long history of paying dividends. I would index invest part of my portfolio (primarily with ETFs that hold U.S and international equities) to get diversification from thousands of companies from around the world. I would bias my portfolio towards equities and limit bond exposure. I would consider hiring a fee-only advisor or use a robo-advisor to help me with my portfolio if I didn’t have the same passion (nor competence) I do today.
Managing a cool million would be a nice problem to have. What would you do?