If you have five million dollars to your name, you’re already doing very well. However, making sure that money lasts over time is an entirely different goal. That requires a specific type of investment strategy, assembling a pool of assets that generates the highest possible income at the lowest possible risk.
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If you have questions about how to build an income plan with your money, consider talking to a financial advisor.
Companies that offer dividend-paying stock pay a portion of the profits to shareholders. The amount a shareholder gets is based on the number of shares he owns. The dividend amount may shift based on the company’s profitability and share price value. You want to choose a company that has safe dividend payout ratios, meaning they only pay out 40% to 50% of annual profits and reinvest the rest back into the company. In our current market, a dividend yield of 4 to 6 percent is generally considered good.
The company’s board must approve all dividend amounts and may also withdraw dividends. Once you’ve bought enough stock or earned enough dividends, you can reinvest the money by buying more stock in that company or other companies.
Dividend shares can be common stock or preferred stock. With preferred stock, the dividend payments must go to the preferred stockholders before the common stockholders are paid. Preferred stock dividends may have a fixed rate or be designed to meet a particular benchmark, which means there may be a quote in the issue descriptions. These types of stocks also usually have a debt function that can pay a fixed dividend amount as well as an equity component.
Certificates of deposit and money market accounts
These are both safe investments and are insured by the Federal Deposit Insurance Corporation (FDIC), meaning you get your money back if your bank fails. A certificate of deposit (CD) and a money market account are insured with the FDIC for up to $250,000 per individual and $500,000 per joint account.
There are some drawbacks to CDs and money market accounts. First of all, there are usually minimum deposit requirements. And if you buy a CD, you can’t cash out your money until it expires, otherwise you risk a fine.
The rate paid by money markets and CDs is less than what you would expect to earn from stocks or income-generating mutual funds, so these should not be a primary choice for income generation. But they are safe and they will still make you a decent amount of money. You can get an online money market account that recently paid 1.6%.
An annuity is an insurance product where you make a one-time payment or periodic payments in exchange for a guaranteed income for a certain period of time. Payments can begin immediately, or at a predetermined date in the future.
There are many different types of annuities available. You can get a life annuity that will run until you die. You can get a fixed annuity, which tells you what the return is, how much you get, how long you get it and when you get it. Annuities, which are generally low-risk, low-growth products, often have a high cost.
You can buy a house or several houses to rent out. You can make a consistent income from your rental home, and the value of your home can also increase over time, allowing you to earn more money in equity in addition to your regular rental income. Real estate can generate a lot of, largely passive, income. If you hire a good property manager, you may be able to do relatively little work and generate a lot of income. In addition, owning a physical property can help protect you from high inflation, as the value of your property will generally increase with inflation.
However, if you choose to invest in real estate, keep in mind that closing costs and property taxes take up a portion of your income. You must also maintain the home. Keep these costs in mind when considering how much income you want to make.
If you don’t want to buy or rent a home yourself, look into a real estate investment trust (REIT). REITs are companies that own income-producing rental properties or own the mortgages on the properties. REITs usually focus on one aspect of real estate, such as commercial or residential real estate. However, there are hybrid REITs that contain both. REIT shares can be purchased through a company or fund.
Master Limited Partnerships
Master limited partnerships, or MLPs, are a way to invest for high returns that go beyond traditional stocks and bonds. MLPs can be traded on an exchange just like stocks.
MLPs have significant return potential. According to the Alerian MLP Index, which measures energy infrastructure MLPs, they have offered an average return of 12.73% so far in June 2022. That was well above the average return of 1.40% offered by the S&P 500.
MLPs can offer investors better returns than bonds. The latter tend to be more sensitive to rising and falling interest rates. In addition to providing higher returns, MLP returns can provide greater stability and consistency compared to other investments.
There are many investment opportunities with $5 million. When you invest without the help of a financial advisor, you want to make sure your investments are safe for your investment experience. If you are a beginner, you may want to start with investments such as ETFs or index funds. Before choosing an investment, consider your risk tolerance and how each investment may align with your future financial goals.
Consider talking to a financial advisor about investing $5 million for income. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors operating in your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
While you decide what to do with your $5 million, you can put some of the money into an interest-bearing savings account. You earn interest as you decide whether to find a longer-term investment. And don’t worry, you can withdraw the money at any time.
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