Having a million dollars (or even five million) may seem like an absurd amount of money for most people. However, those who are looking to retire early may find that five million dollars is not that much money to ensure an easy financial life.
Considering inflation and interest rates on real estate and the stock market, a million dollars can run out easily. In essence, the key to saving money in these cases is to follow a series of strategies to get guaranteed and steady returns on investments.
Following simple investing strategies can help people make a million dollars last for a long time. However, not everyone knows what these strategies are, making it a bit more challenging to make lucrative investments. The best way to make the most exciting investment to get a guaranteed income stream is to work with investment professionals who can assess the person's individual case.
The Kelley Financial Group is trained to give investors the necessary information so that they can diversify their portfolios, make other fixed-income investments, and ensure a much healthier and successful financial future, especially when it comes to real estate investing.
This article covers the basics of how to invest five million dollars successfully, so people looking to retire early may benefit from the content laid below.
Is It Possible to Retire with a Million Dollars? or How Much Money Does Someone Need to Retire?
According to advice most investment professionals follow, the answer depends on the person's current income. In essence, the person's retirement income should be at least 80% of their final pre-retirement income. If the person makes a million dollars each year, they're going to need at least $800,000 each year to stay comfortable after leaving work.
It's important to note that the amount people need to achieve financial freedom upon retirement depends on their sources of income, such as pensions, part-time employment, and desired lifestyle.
In this case, most people believe that retiring with five million is enough for them. However, if they don't apply the right investment strategies, that money could run out faster than they expected. As mentioned before, the best way to avoid these problems is to work with a financial planner (or financial advisor) to assess several things, such as property taxes, rental property gains, and stock market details.
The following sections go over all the strategies investors can consider to make the most out of their five million.
Building a Good Portfolio and Diversifying Assets
Most financial advisors let their clients know that the most vital part of investing large amounts of money is to focus on where they're going to place their assets (also called 'asset allocation'). In essence, investors must keep a balance of different asset types, covering stocks and bonds at the same time, for example.
Typically, young investors focus on stock assets, whereas people going for retirement are more eager to take risks. People looking to save more money toward retirement may focus on investing in bonds and fixed-income investments since that prevents the money from disappearing in the future.
Investors who place all their money into one asset type may be at risk of losing everything in case an unforeseen event happens. Regardless of the amount of money the person has, the best way to go is to work with a balanced portfolio.
On the other hand, a great way to ensure a more stable personal capital is to make sure the portfolio is also diversified. A diversified portfolio means that the person invests in different companies and financial tools instead of placing all their money into one company. This is an excellent option for those who want to prevent their financial instruments to get too many losses in case a company goes bankrupt.
Another excellent example of this would be if the person had five million and invested a million in five different companies, the person can't lose all their investments if one of the companies goes bankrupt.
People who want to make a safe investment may consider getting Certificates of Deposit (CDs) into their portfolio. CDs are available from many banks, and there, the investor gives the bank a particular amount of money that it's going to hold for a set amount of time.
Not many people like this investment option since the return rate is often low. However, the return is always guaranteed as long as the person keeps the money in there. Making early withdrawals in these cases can result in a considerable penalty, so it's safe to say that CD investments are financial instruments that force the investor to keep their money there until the time frame ends.
Watching Index Funds and ETFs
Some people may get lost in the process of diversifying their portfolio since there are a lot of companies to research. Overall, people cannot simply invest in any company since if they fail in the near future, the person may lose their investment. Even if the investor does a lot of research, there's no guarantee that they're making the right choice; they may only assume.
A great way to diversify a person's portfolio is to invest in index-driven funds or exchange-traded funds (ETFs). In essence, an index fund invests in a group of companies on a stock exchange. The indexed fund follows the market index, such as the Dow Jones Industrial Average.
The person can look for indexes that track a particular sector in the world, such as energy, healthcare, or others. In these cases, the person's investment is going to go high or low depending on how the market behaves.
While some people may not consider index funds and ETFs a good short-term investment, those aiming for long-run investments for early retirement may benefit from this.
Real Estate Investing, Annuities, and Other Investment Types
One of the best investments an investor can make is in real estate, and it's because there are a lot of factors that involve real estate, so the person has a range of options to consider to ensure a steady income for the future. In essence, real estate can be a person's primary home, a rental property, or even a business building.
People who make excellent real estate investments may enjoy a great return rate in the future. Moreover, the investor may sell their properties once they get older and get a considerable return. Many people go for rental properties since they can provide a steady income for decades.
However, it's important to consider that choosing rental properties for real estate investments also involves a lot of factors, such as maintenance and upkeep costs. If the person is able to comply with all of those factors comfortably, they may invest in real estate successfully.
Other people consider annuities as an investment. These are contracts the person makes with insurance companies for financial security. There, the investor pays a monthly or yearly premium in exchange for income, which can begin when the person decides. Some people decide to go for one-time premiums to start getting their funds earlier.
Annuities are often considered complex to understand, but these are a viable way to ensure a person's financial future and avoid significant penalties or money disappearing in the future.
Business Investments
One of the riskiest (but most profitable) investment ideas is to go for a business idea. If the person has a great idea to work with, they may even be able to double or triple their investment in a particular amount of time. Business investing is risky since, statistically, 50% of new businesses fail during the first five years, making it a less attractive option for investors.
The reason this investment fails is that, if the business itself fails, the person often doesn't have any collateral to cover the losses, which is why banks often don't give loans to people, even if they have great credit.
People who are eager to make a business investment may treat their investment as if it were venture capital, meaning there's at least a 50% chance they're going to get their money back. Even then, it's better to consider this idea with a financial advisor as long as the person can afford to take these losses.
Most banks prefer to give loans on the property since these are more likely to increase in value in the future. As mentioned before, business investments are not as attractive as other investment ideas, but they're still an option for those who want to try.
Real Estate Investment Trusts (REITs)
REITs have been gaining a bit of popularity over the past few years, and this is because these trusts allow investors to invest in real estate without having to buy a property. In essence, the investor invests in real estate projects to gain equity. Those starting in real estate investing may have an easier time with REITs than with other investment types.
However, it's important to note that people who invest in REITs often have little control over their money, so they may want to do proper research on the REIT they're placing their money in first.
Crowdfunding Real Estate
Another idea some people consider for investing is crowdfunding. Here, many people pool their money together to pay for real estate projects. In essence, the money gathered is used to fund the project, and the people get a return, which can be a particular amount of money, a loan, or a particular service when the project finishes.
Crowdfunding is a great option for both new and professional investors since it allows them to participate in considerable real estate projects without having to place a lot of money in them.
Bonds
U.S. Government Bonds are considered safe investments since they're backed by the government. Here, the person receives income through interest. However, considering that these bonds are insured by the government, the returns are typically limited. In case the person is looking to make small investments to diversify their portfolio, bonds are a great place to start.
Questions to Ask Oneself Before Investing
There are a few questions an investor may ask themselves before making any significant investment. Considering this article is focusing on five million in investments, particularly, it's vital for the person to know what they're getting themselves into. Here is a list of common questions the investor must ask before making any financial decision:
What Is the Person's Investment Timeline?
Every investor must focus on working with an established timeline to achieve their financial goals. In essence, the timeframe involves how much time the person is going to hold an investment. In the case of retirement, the person may go over long-term investments over short-term ones, depending on their age.
What Are the Person's Financial Goals?
The core of any excellent investment is to have a clear goal in mind. Overall, the person must make an investment plan based on particular financial goals. Some people make investments without knowing what they want for the future, causing failure and losses.
Whether the person is working toward retirement, education, or simply a safety net of money for the future, they need to establish goals.
What Is the Person's Tolerance to Risk?
There's always going to be a particular risk degree in every investment. If the person can't afford to lose their investment, for example, their risk tolerance would be low. On the contrary, if the person can partially or completely lose their investment and stay unaffected, they may have a high-risk tolerance.
Logically, it's much better to have a high-risk tolerance since it takes a lot of pressure off the person's mind. Moreover, it allows them to make better financial decisions with a clearer mind.
Bottom Line
Investing five million isn't as easy as it seems, but with proper guidance, it's possible. It's always recommended for any investor to work with wealth advisors in Pittsburgh PA who can assess the person's goals carefully and accurately.
Considering the investor is working with five million or more, they must be extremely careful with whom they trust their money. Any wrong moves, and they may lose a significant amount of money in the future.
Any person who needs financial help may seek advice from the Kelley Financial Group. The team there has served the people in Pittsburgh, PA for quite some time now, and they're ready to assess any financial needs their clients may have (e.g. how to rollover a pension in an IRA).