General Question

Eggie's avatar

What do you invest in with one million dollars?

Asked by Eggie (5148 points ) February 10th, 2014

You just won the sweepstakes and you got one million dollars. How do you invest it to make more money?

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15 Answers

janbb's avatar

A mixture of mutual funds, tax-free bonds and possibly some in money market funds or laddered CDs – although they have very low interest rates at this point.

Cruiser's avatar

I’d probably take at least half and buy up some undervalued properties and then buy some stocks with the rest. Mostly stocks with decent dividends.

Pachy's avatar

I think I’d invest at least some of it in renewable energy companies.

gailcalled's avatar

Depends on your age, your future earning capability, your other sourcess of income and retirement plans (and your central nervous system.)

Some mutual funds, a chunk in both growth and value stocks and 6 months emergency funds in a money market fund (which is earning essentially nothing) is one plan.

With a conservative investment plan, you can earn about $32,000 in yearly income after taxes (give or take) and a little growth in principal to approximate the COLA.

Coloma's avatar

Well..if the interest rates were still at 5% or better you could simply “invest” your one million and live off the interest. That’s what I would do, but alas, those days are gone forever.

zenvelo's avatar

A buy/write strategy of 5,200 shares of SPY bought against a regular monthly writing of 52 $5 out-of-the-money call option contracts.

gailcalled's avatar

^^ What does that mean?

LuckyGuy's avatar

@zenvelo Yep. But I would limit my option positions to 10% max.

Aster's avatar

I’d first spend 10% of it on fun stuff just to get that out of my system. Then I’d buy high yielding stocks like that rotten, good for nothing Philip Morris. It could go way up again and pays a fabulous dividend. And I know I couldn’t resist buying more shares in pharmaceutical stocks that have gone up pretty fast like Depomed. I’d like to buy some undervalued vacant lots if any are available, too. And I’d give a nice check to my daughters. One is rolling in diamonds ; the other one is living in squalor too dreadful to discuss.

Wealthadvisor's avatar

If you won one million dollars, the federal government would withhold 25%, so you would net about $750,000. But if the net amount were one million dollars, you need to take one very important item in mind. Where do you save it, and what investments do you use so you can afford to pay the tax.

If you earn 5% and are in the 28% tax bracket as a percent of income, your net return is about 3.6%. You would be earning about $36,000 in the first year. The tax would be about $14,000. If you take the $36,000 each year, you need to be sure that you have enough income to pay the $14,000 in tax without having to take money from the $36,000, (leaving about $22,000.) This is not a bad way to add another $22,000 to your annual income, but you have to look a the lost opportunity cost to see what the real numbers are.

You can not just take the recommendations others because we need to know what your financial portfolio looks like, your risk profile, you specific financial situation and whether or not you want to let the money compound or spend the gain each year.

Most people, when the win a lot of money, lose sight of the cost of tax. This can mean $600,000 to $1,000,000 in lost wealth over a 30 year period. Once tax is paid, you can never get that money back.

zenvelo's avatar

@Wealthadvisor You applied the tax twice. You don’t pay $14,000 on the $36,000 net, you pay the $14K on the $50K gross.

Wealthadvisor's avatar

Correct. Looking at the wrong column. You net $36,000 on $50,000 after tax. But the LOC calculation is still the same.

Thanks for catching the error.

Wealthadvisor's avatar

The other problem I should have mentioned is what happens if you let the money compound. Each year the tax bill increases, perhaps pushing you into a higher tax bracket.

In the tenth year the tax is $21,719 on $77,566 of earned interest. And what happens if you are able to do better than 5% over your lifetime. 10% return makes the tax $66,023 in the tenth year. It is now getting to the point where there is not enough other sources of income to cover the tax, so you must start netting the account. Once you start doing this, you start to impede compounding and increase the rapid loss of wealth.

zenvelo's avatar

Although, @Wealthadvisor, you could do all that in an IRA and not pay taxes until the withdrawals thereby compounding wealth on the deferred taxes into a greater return.

Also, taxes will never be greater that income in a year. And why would the tax be $66,023 in the tenth year unless your income was approximately $200,000? Marginal tax rates in that bracket (<$406,750) is 35%.

Wealthadvisor's avatar

$1,000,000 compounding at 10% would grow to $2,347,948 in year 10. The interest earned in year 10 would be $237,795. The tax using a 28% tax bracket as a percent of income is $66,023. This means the client needs to have $66,023 from someplace to pay the tax or he has to net the account. For a married couple, the 28% tax bracket starts at $146,400 to $223,050. The 33% starts at $223, 050 and runs till $398,350.

Since the interest earned is considered income, and is greater than $223,050, Technically they would be in the 33% bracket, but with deductions, my assumption is that the taxable income would drop below $223,050, thus 28%. It could be more or less depending if there was earned income beside the interest earned on the sweepstake winnings and the couple had large deductions. You can get more specific in the tax calculation. For example, the tax bracket on $406,750 as a percent of income is 27.22%. That is because all the money is not taxed at 35%, just the amount above $398,350 to $450,000, then the amount between $223,050 and $398,350 is taxed at 33%, and so on.

It is difficult to explain to clients tax calculation as a percent of income, so for explanation purpose, I just use the tax bracket number, not the tax a percent of income. The tax as a percent of income is calculated when you do your taxes.

The IRA would not work because you can only put $5,500 per person per year if under 50 and $6,500 if over 50. There is no way to tax shelter $1,000,000 lump sum in an IRA unless the money was coming from another qualified plan as part of a rollover.

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