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How can I make a $5 million windfall last?

December 05, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Choosing advisors

Q: I recently came into some money. I have $5 million to try to live off for the rest of my life. What is the best investment for a monthly return?

A: Congratulations--most people would envy your situation, and many might wonder what is so tough about living off of $5 million. However, over the course of a lifetime, there are many things that can make it difficult to make your money last--even a sum as large as $5 million.

There are so many variables involved that it is impossible to give you a definitive answer on what you should do with your money, but there are some important principles that can be outlined. Considering these factors can help you make sound decisions about your investments:

  1. Time frame. You mention monthly returns, but it is important that you adjust your focus to account for both immediate and long-term needs. If you focus too much on, say, immediate income, you might steadily lose ground to inflation. Over the long run, inflation can have an even more devastating effect on your wealth than the ups and downs of the stock market.
  2. Diversification. Simply put, this means don't put all your eggs in one basket, but to be more precise, you need different investments to play different roles. For example, savings accounts and other cash equivalents provide stability and liquidity; bonds can provide income; stocks can provide growth potential to help counter the long-term effects of inflation.
  3. Budgeting. If you aren't used to that kind of money, $5 million can seem like a bottomless well, but it is amazing how quickly people have managed to run through even larger sums. So, you need a long-term plan for making your money last, and you need to adjust your budget from year-to-year to fit this plan.
  4. Choosing advisors. You may need some professional advisers to help you handle your money, such as accountants, financial planners, and investment advisers. Do some comparison shopping to make sure their fees are reasonable. Select professionals who are independent from one another, so they'll be looking over each other's shoulders to some extent. Avoid giving anyone full discretion over your money--specifically, the power to make withdrawals without your approval.

Unless you are a sophisticated investor who wants to take an active role in monitoring individual investments, it might be best for you to shy away from hedge funds and private investment schemes. Stick with FDIC-insured savings accounts, CDs, or money market accounts for the conservative portion of your holdings, and publicly-traded stocks and bonds for your longer-term investments. This won't guarantee success, but it will reduce your risk of being victimized by fraud or disproportionately large losses.

Got a financial question about savings, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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