I’m about to inherit $1 million from my family – should I live off 5% a year or invest for growth?

Becoming the recipient of a sudden capital injection can be lifechanging, especially when that amount seeps into the seven-digit range. We came across a Reddit post in which the account holder was about to inherit a major windfall – approximately $1 million from a family inheritance. As someone who has plans to “retire with a fat stash,” as the account states, this Redditor wanted to do their homework to determine the best use of those funds.

Our soon-to-be-heir is a 20-something young adult earning an annual salary of $70,000 while living in Toronto, Canada with his girlfriend and boasting a healthy personal balance sheet, including $200,000 across ETFs, stocks and cryptocurrencies, with zero debt or car payment. He expects to walk away from the settlement with roughly $1 million and is determined not to screw it up, explaining: 

“I know $1mm parked away at a 5% withdrawal rate is $50k a year which I could comfortably live off, but I’m not sure if that’s the best use for the money. I’d like to meet with a financial advisor for some insight as to what my options could be, and would love some insight as to where should start looking.” 

Let’s dive into the numbers: 

Assets: 

• $70,000 annual salary 
• $200,000 in savings and investments 
• $1 million cash windfall 

Living Expenses: 

• Less than $50,000 per year (we know the Redditor said he could easily live off of $50k per year) 

Financial Windfall 

We would advise our future heir to take his time before making any sudden decisions. Next, as you weigh your options, you will find that what you decide could set in motion a chain of events for the rest of your life. Consider your financial goals, whether that includes eventually getting married, traveling, owning real estate, etc. By looking out on the horizon of your life, you should be able to make more informed decisions. 

Also, you haven’t mentioned the idea of enjoying any of the funds. Nevertheless, you might want to consider using even a small amount to do something for yourself that you enjoy. Now let’s get into it.

The good news is that you don’t have to decide what to do with the cash immediately, as you’ve got options. For example, you could direct the money into a money market account at a bank or credit union for several months, giving yourself time to get used to the idea of suddenly having a windfall to manage.

While $50,000 a year from a $1 million nest egg at a 5% withdrawal rate might appear like a simple solution, it’s understandable to question whether it’s the best use of the money. There are other factors to consider, and discussing your strategy with a financial expert is a prudent move.

One way to think of the $1 million windfall is as a massive tool. You could harness that tool for a real-time revenue stream, paying you just under $5,000 per month. On the flip side, that tool also has the ability to unlock greater income, even generational wealth, in time if you play your cards right. Keep in mind that today’s 5% withdrawal rate could be diminished over time with inflation, giving you less bang for your buck. And don’t forget about Uncle Sam, or in your case Johnny Canuck, ensuring that you choose the most tax-efficient strategy.

As a 20-something heir, you are a young investor. You also mention cryptocurrency investing, suggesting that you might have a pretty good tolerance for risk. This is something to consider when choosing if and how to invest in juxtaposition to your financial goals. One of the commentors on your thread highlighted diversification. You could invest the assets in such a way that you have diversification across various asset classes, including those that generate both short-term and long-term income streams, including dividend stocks, index funds, private equity funds, etc. now that you are included among the high-net-worth investor base.

Of course, this is just one person’s opinion. As the Redditor stated, he could greatly benefit from engaging a qualified financial advisor who can more accurately answer the financial question. 

The Takeaway 

Coming into a sudden cash windfall brings new opportunities but also responsibility. In your case, it doesn’t sound like you need the money to live on though it would make life easier in the near-term. At the end of the day, a financial expert will help you make the right decision that aligns with your financial goals.

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