The other night, we hired a limo van to take our staff to our office christmas party. The driver (a retired cop) was a nice man. He said he wanted us to know that the night before the 12 mental health workers who had won the 21 million sat in our very same seats as they went to collect their winnings. They were so happy he said and nice, level-headed people: “They already had their financial advisor and everything. They had me drive them from picking up the cheques straight to deposit them cheques into the right hands.” The driver was so happy for them.
I shuddered at the thought of these trusting, gullible souls getting a lump sum probably for the first time in their lives, trying to do the responsible thing and carefully handing it off to a financial advisor. An advisor who will almost certainly have it ploughed into commission generating equities and mutual funds by week’s end–just in time for the next global recession and cyclical bear market. Worse, there is more than a 50% chance that the advisor will recommend that they pay off their mortgages with the money–only to then borrow it back as an “investment loan” so that they can keep more money “working for them in their portfolio”. [Working for who?] Most of them will also probably be told they can stop working now that they are millionaires as they are counselled to set up (unsustainable) withdrawal rates from the money of 6- 7- even 8% a year. Sadly, the 1.7 million each has a tiny chance of lasting and serving them well for the rest of their lives. That truly is a tragedy.
For anyone who has already won, earned, saved or amassed a lump sum or might receive one in the future, please consider this free, valuable advice that will serve you and your family for the rest of your life:
1. Pay off all your debt and never borrow money again.
2. Place at least 50% of the money you have left into guaranteed deposits in your home currency with some coming due every three months for the next 3 years. As each note comes due roll it back over for a similar term.
3. Do not buy any fancy financial products like tax shelters, limited partnerships, insurance investments, or levered margin accounts. Insurance should be bought when you need to insure a risk, not as an investment type.
4. Do not take your advice from a financial advisor that is paid to sell you financial products or from a firm or manager who receives a higher fee from the capital that they have you allocate to the equity side over the fixed income side. This type of fee structure is the norm in the business and it places the advisor’s best interests in direct conflict with your best interests as a client. I cannot stress this point enough.
5. During a secular bear market like we have been in since 1999 and are likely to be in for a few more years, stock markets must be carefully timed in order to make any net returns. Putting cash in when ever you happen to get money– trying to buy and hold for the long run, or increasing equity exposure and risk to make more, buying “blue chip, dividend-paying stocks”–all rubbish likely to result in permanent capital losses for you.
6. Do not buy mutual funds, wrap and “fee based” accounts unless you or the manager have an established rule set about when to buy and sell risk exposure. There is no diversification benefit in products that keep you constantly invested in every market climate and at every level of price risk.
7. Realize that in order for this money to last and serve you for the rest of you life, you cannot safely withdraw more than 3-4% maximum per year. On 1.7m, this means you should not withdraw more than 50,000 to 68,000 gross of tax maximum per year. If you cannot meet your spending needs or wishes on this level of income, do not quit working yet!
8. Realize that most people have very little money, so many of those around you will think that you are rich and expect or hope that you will share the wealth by giving them loans, help, gifts. Be extremely careful with how much you give away, keeping in mind the 3-4% withdrawal rate noted above. In other words each 10,000 you give to others is 300-400 less income per year for you. There is a direct connection between how much you give away and how much income you will have to support your life.
9. Don’t start “living like a millionaire” with lavish spending and purchases. The only true millionaires today are those who have a million dollars in income coming from safely invested capital. To get 1 million in income, properly invested to protect capital, a person needs to have 25,000,000 in their investment accounts. Those who have 1 million of assets in the bank should live like they make 40k a year.
