With $70,000 income and a potential $1 million windfall, how do I set myself up financially for life?

A Reddit user in his late 20s who is earning $70,000 right now is on track to get a windfall from his family. He’ll be splitting the windfall, which includes $900K and a home valued at between $1 and $2 million, so he expects to walk away with $1 million when all is said and done. 

He said that he’s aware he could invest the $1 million and generate $50K in annual income from it at a 5% withdrawal rate, which he said he could comfortably live on. However, he also said he’s not sure if that’s the best use of the money.

So, should the Redditor take the cash and start drawing from it, or should he make a different move? 

What to do with a large windfall

As many other Reddit posters said, the absolute worst thing that the original poster (OP) could do would be to just start living off the money — especially at a 5% withdrawal rate.

First of all, that is nowhere near a safe withdrawal rate to make the money last, especially given that the poster is in his late 20s. Experts now recommend a 3.7% withdrawal rate, and that’s to give you a good chance of making your money last for 30 years. If the OP was planning to live off the inheritance starting in his late 20s, he would need to make the money last a lot longer than that.

He’d also destroy his chances of getting any type of reasonable future Social Security benefit because you need to work a minimum of 10 years to get benefits, and your benefits are based on average wages over a 35-year career. And, his expenses are almost inevitably going to go up as he gets older — especially if he gets married and has kids. So, $50K probably wouldn’t be enough, even if he could spend that much without the money running out.

Instead of spending the money, most Reddit users agreed he should invest it and not touch it for a long time. This $1 million nest egg can grow over time and help him create real wealth that helps him retire at a young age and truly enjoy his life, rather than struggling to get by on $50K and taking a serious risk of spending the funds down to nothing. 

Investing early is the best way to build wealth

As our compound interest calculator shows, it doesn’t take long for $1 million to turn into a lot of money thanks to the power of compound growth. If the poster can earn an 8% average annual return, which is more than reasonable with a diversified investment portfolio, in 15 years, that $1 million will have turned into $3,172,169.11. That would provide $117,370 in annual income at an actually safe 3.7% withdrawal rate, and he’d still be able to stop working in his 40s. Or, he could go a little longer to end up even wealthier. 

The fact is, it’s easy to get excited about receiving a lot of money — but many people who receive an inheritance or other windfall end up squandering it. Since the poster wasn’t planning on just quitting work, there’s no reason he should consider doing that now just because he received $1 million, especially since that’s not really enough to live on for life.

This poster, and anyone else who receives a big inheritance, should seriously consider talking with a financial advisor before making any moves. An advisor can provide insight into what the money can realistically do for you, and help you make a plan to maximize it instead of risking losing the financial stability that a big windfall has the potential to provide. 

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