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A $10 million nest egg can last you decades, especially if you make smart investments that prioritize income generation. But with all of the options available, choosing what’s right for you can be difficult. However, just because you have a lot of money doesn’t mean the basics of investing don’t still apply. After all, your ultimate goal is still to retire and live out your life as comfortably as possible.
A financial advisor can help you build an investment strategy that supports your financial needs and long-term goals.
What to Consider When Investing $10 Million
Regardless of whether you have $10 or $10 million, the rules of good investing apply regardless of the stakes. For starters, you should always have a specific plan in place to dictate the management of your portfolio. More specifically, here are some important investor characteristics to identify about yourself:
- Risk tolerance: The most important factor in investing. It will dictate how risky you’re willing to be in the name of stronger returns. For instance, if you’re far from retiring, you might take a chance on riskier stocks for a better return. Those close to retiring, conversely, might stick to safer investments to keep their balance high.
- Time horizon: This is roughly when you want to achieve a specific financial goal, which is most often retirement. In other words, decide when you want to retire.
- Income needs: Once you quit your job and retire, you’ll start pulling money from your retirement assets. Defining how much income you’ll need to live on will be enormously helpful when investing.
- Liquidity needs: This is how easily you can turn your investments into cash, which is very important for some people. Stocks can be easily bought and sold, which makes them liquid. On the flip side, real estate can take some time to sell, which makes it illiquid.
- Investment preferences: You may have certain investments you’re partial to, like certain companies or funds. It’s fine to include them in your portfolio, but be sure to avoid hasty and emotional decisions.
See where your investment strategy could take you. Enter your starting balance, contributions and expected return to estimate your portfolio’s future value.
Investing in Mutual Funds
Mutual funds typically provide income through dividends from stocks, interest from bonds, and capital gains distributions. With $10 million to invest, you have access to a broad range of funds. This includes different share classes and strategies with higher minimum investments. However, a high minimum does not necessarily mean a fund will charge lower fees or produce higher returns.
Mutual funds also offer professional portfolio management and diversification across multiple securities. Investors should compare expense ratios, sales charges, investment objectives, historical volatility and distribution policies. These factors will help you determine whether a particular fund fits an income strategy. Funds that make regular distributions can still lose value, and distributions are not guaranteed.
Investing in Hedge Funds
Having $10 million may give you more investment opportunities than the average investor. This includes being able to invest in hedge funds. Hedge funds pool investor capital and can use strategies such as short selling, derivatives and leverage in an effort to generate returns. Access is generally limited to investors who meet applicable eligibility requirements, such as accredited investor standards.
Hedge funds can invest across stocks, bonds, commodities, currencies, derivatives and real estate. Their greater investment flexibility can also introduce substantial risks, including leverage, illiquidity and larger potential losses. Fees, redemption restrictions and limited liquidity can vary considerably among funds, so investors should review a fund’s strategy and terms before committing capital.
Investing in Dividend-Yielding and Preferred Stocks
High-net-worth investors seeking income should also consider securities available to less wealthy investors. For example, dividend-yielding shares pay out a portion of profits to stockholders. This is where the income generation comes into play. Dividend payouts usually occur quarterly, though some occur on a monthly or annual basis. But keep in mind that some dividend payments are non-recurring. While dividends are usually distributed as cash, some companies provide extra shares as a dividend.
You could also purchase preferred stocks, which offer dividend payouts as well. Preferred stock generally comes with a fixed dividend rate. Dividends to preferred shareholders are paid before dividends to common shareholders.
It’s important to note that since you have more capital to work with, your recurring income may be a more substantial amount. For instance, if you have 100,000 shares of a stock that pays out 10 cents per share quarterly, you may receive a quarterly check of $10,000.
Taxes can also affect how much investment income you keep. Qualified dividends generally receive the same federal tax rates that apply to long-term capital gains, while ordinary dividends are generally taxed as ordinary income. High-income investors may also owe the 3.8% net investment income tax on certain investment income when modified adjusted gross income exceeds the applicable threshold.
Investing in Exchange-Traded Notes (ETNs) and Exchange-Traded Funds (ETFs)
Exchange-traded notes (ETNs) and exchange-traded funds (ETFs) can provide exposure to indexes, sectors and other market segments, but the two investments work differently. An ETF generally owns a portfolio of assets, while an ETN is an unsecured debt obligation issued by a financial institution whose return is linked to an index or benchmark.
That distinction creates issuer credit risk for ETN investors in addition to the market risk associated with the underlying benchmark. ETNs can also carry liquidity, pricing and complexity risks, and some may not make periodic interest payments. This means they should not be treated as a source of predictable cash flow simply because they track an index.
ETFs may be more useful for building a diversified income portfolio because they can hold dividend-paying stocks, bonds or other income-producing securities. Depending on the fund, investors may receive dividend or interest distributions while retaining the ability to buy and sell shares on an exchange. Fees, yields, asset composition and tax treatment vary by fund.
Tax treatment for ETNs can vary based on the structure of the note, so investors should not assume that every ETN provides the same tax advantage. With a $10 million portfolio, taxes on dividends, interest, realized capital gains and other investment income can materially affect the amount of income available to spend.
Investing in Real Estate
A large capital base expands real estate options, which tend to require active oversight but can provide steady income and long-term returns.
Real estate investing can generally be expensive, which means having $10 million in your corner gives you a huge advantage. Rental properties can generate income through rent while also offering the possibility of appreciation, although neither income nor property values are guaranteed. Expenses such as property taxes, insurance, maintenance, vacancies and management fees reduce the amount of rental income you keep.
If you want to invest in real estate, it can cover anything from houses to commercial buildings to apartments and condos. Your choices can also include real estate investment trusts (REITs) and other pooled real estate investments if you want property exposure without directly owning and managing buildings.
One thing that scares people away from real estate investing is needing to be a landlord. While this can be daunting, you can also hire a real estate management company to handle those things. Paying for professional management reduces the work required from you but also adds another expense that can lower your net rental income.
How Much Income Could $10 Million Generate?
A practical way to approach a $10 million portfolio is to start with the amount of annual income you want and work backward to determine how much of the portfolio would need to support it. The percentage you withdraw or generate as income can have a significant effect on how long the portfolio lasts, particularly when withdrawals continue through periods of weak investment returns.
For example, the table below shows the annual and monthly amounts represented by several percentages of a $10 million portfolio. These figures are illustrations rather than guaranteed investment returns or recommended withdrawal rates.
| Percentage of Portfolio | Calculation | Annual Amount | Monthly Amount |
|---|---|---|---|
| 2% | $10 million × 2% | $200,000 | $16,667 |
| 3% | $10 million × 3% | $300,000 | $25,000 |
| 4% | $10 million × 4% | $400,000 | $33,333 |
| 5% | $10 million × 5% | $500,000 | $41,667 |
The table shows that each percentage point of a $10 million portfolio represents $100,000 in annual income. For example, drawing $400,000 per year would equal 4% of the original portfolio, while $500,000 would equal 5%. Your actual sustainable income would depend on investment returns, inflation, capital gains taxes, spending, portfolio allocation, and how long you need the money to last.
You can also separate your near-term spending needs from money intended for longer-term growth. Keeping enough liquid assets to cover planned withdrawals can reduce the need to sell stocks or other volatile investments during a market decline, while the remaining portfolio stays invested according to your longer-term strategy.
A financial advisor can help you estimate how much annual income your $10 million portfolio could support based on your spending needs, taxes and investment strategy.
Bottom Line
A $10 million portfolio gives you many ways to generate investment income, including mutual funds, dividend-paying stocks, preferred stocks, ETFs, real estate and, for eligible investors, alternative investments such as hedge funds. The amount you can reasonably draw from the portfolio depends on more than its starting balance. Investment returns, taxes, inflation, liquidity needs, asset allocation and the length of your investment horizon can all affect how much income the portfolio ultimately provides.
Investing Tips
- Consider talking to a financial advisor about how to invest a multi-million-dollar nest egg for income. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If your investments pay off, you may owe the capital gains tax. Figure out how much you’ll pay when you sell your securities with our capital gains tax calculator.
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