A reader wrote to me recently and asked how I would invest $50 million after taxes. At first, I assumed this was a hypothetical question, but after exchanging a few emails, I found out that this was a real situation from someone who suddenly found themselves involved in managing a trust. This trust has one beneficiary, a teenage girl, and all of her descendants, but will be managed by another person in perpetuity, receiving a small stipend from the trust.
The easiest way to frame this question is what would I do if I had $50 million to invest, live off of, and fund my family’s future?
First, I’d determine exactly what I need to live each year. What are my monthly expenses for what I do now and what I would want to do in that situation? Let’s say, hypothetically, that I decided I needed $250,000 a year in income after I evaluated this situation.
Next, I would invest enough of the $50 million to provide that steady income in a rock-solid fashion. This would probably come in the form of 10 year treasury notes. Let’s say the current yield on the treasury notes was 4.9%, which means that each year, I’ll receive 4.9% of the face value of the note. In order to receive $250,000 a year, I’d have to have $5.1 million of the money in treasury notes.
This amount would be adjusted annually by purchasing more treasury notes to keep up with inflation, but if the investments of the remainder of the $50 million are doing well, the portion devoted to sustaining my income level will gradually grow smaller.
This portion of the portfolio would serve solely to cover my living expenses. The rest of the portfolio would be invested to make sure I’ll always have living expenses covered, as will my children and perhaps my grandchildren.
So how would I invest the remaining $44.9 million? This is really up to the individual investor and how much time they want to spend managing it. For me personally, I would invest about 70% of it in broad-based index funds covering a variety of different markets, perhaps something like the Vanguard Target Retirement 2050 fund, and the other 30% would be played with in individual stocks in companies I believe in. Remember, all these investments have to do is return about 6% to keep growing in perpetuity (at least until there are more people drawing from the money).
At some point, you would have to ask yourself if you were shooting for growth with that $44.9 million or for long term security with it. Given my temperament, I would prefer security from it, so my investment choices would reflect significantly less risk than someone who imagines becoming a billionaire someday.
If you have that sort of money, though, you should look into serious wealth management, not the advice of an individual investor just hoping to build a good retirement.