Mar 13, 2006, 7:57 am
You surely have fantasized about what you'd do after winning one of the big lotteries.
First, of course, on your buy list would be a hot, red convertible. Then, when spring arrives, you and a significant other could drive the convertible to Winter Park in the Denver area, to shop for a log second home in the $400,000 price range.
With that mission accomplished, you might return to Nebraska and pay off the mortgage of every family member.
Finally, you'd schedule a friends-and-family Caribbean cruise.
After blowing off the first million of the jackpot, how do you preserve and grow the remainder so that it lasts as long as you do, making it possible to leave your own legacy?
Anyone faced with the stewardship of millions may have to consider new investment strategies:
"You never eat the seed corn." I first overheard this comment by a well-to-do farmer as a kid growing up in a small town. Even then, I understood that spending more than you earn eventually wipes out savings. Newly-minted millionaires who ignore this fact of life get poor again.
Treat cash as an investment. I have no clue where Lincoln's newest millionaires temporarily parked their massive lottery winnings. There was certainly nothing wrong with doing nothing except keeping the windfall safe in, of all places, "cash" accounts.
Right now, oh-so-boring cash is the king of alternative investments. Cash deposited in taxable money-market mutual funds, or in short-duration CDS, is earning more than twice the dividend yield of the S&P 500 index of large-company stocks.
As the Federal Reserve continues to push short-term rates higher, cash competes directly with the yield on 10-year Treasury bonds. Yet when inflation surges, cash is less vulnerable than bonds.
The seven-day average yield of money-market mutual funds is now above 4 percent - the highest in about five years. Yields on several of the largest money funds are at 4.25 percent.
Fourteen consecutive interest-rate increases by the Fed since June 2004 have lifted yields. Shop for the best yield on 12-month CDS, and you'll find several at 5.25 percent.
Leverage a high tax bracket with munis. A big winner in a multi-state jackpot is instantly thrust into the top 35 percent tax bracket. That isn't all bad: In higher brackets, municipal-bond yields are enticing. For example, in the 35 percent bracket, a Nebraska tax-exempt bond yielding 5 percent is the equivalent of having a taxable bond yielding 7.69 percent.
We assume that most of us will never have to ponder these stewardship strategies.
Yet the law of probability argues that another huge jackpot winner could be drawn in Nebraska. The odds are astronomical, just as in the lucky February win by a group of Lincoln lottery players.
But Powerball is merely a random drawing of six numbers from a limited pool: Betting the big pots makes the most sense because the odds of winning are the same each time numbers are drawn.
A seven-figure nest egg is not a utopian dream. It will be discipline, not lottery luck, that's likely to make you a millionaire.
I'll continue to argue that anyone with an average income and a heap of discipline can accumulate a net worth (assets minus liabilities) of a million bucks by retirement.
It is an entirely realistic goal for anyone willing to adopt the 15-over-15 strategy, in which 15 percent of earnings is contributed to diversified IRAs and employer-sponsored retirement accounts over a 15-year period.
If reaching the seven-figure mark sounds like a utopian dream, note that more than 7.5 million millionaire households already exist in the U.S., according to a Spectrem Group study.
It's true that American families have struggled mightily to grow their net worth in the aftermath of the bear market that began in 2000, followed by the brief recession of 2001.
In a recent look at household balance sheets, the Federal Reserve found median net worth was $93,100 at the end of 2004, an increase of just 1.5 percent from 2001, adjusted for inflation.
Most people in the baby-boom bulge, with any luck, will inherit roughly $60,000 about the time their retirement looms, according to a T. Rowe Price study. Since this inheritance likely would cover just one year of retirement, consider using it as an aggressive core holding.
Here's the strategy: Invest 60 percent in low-cost U.S. stock funds, another 20 percent in international funds, and the remainder in fixed income. Expect a 9 percent annual return on average. Even a 6 to 8 percent return would double the portfolio value about every 10 years.
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