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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
I’ll be receiving an inheritance from my grandfather who lived in Florida. It’s more money than I’ve ever had and I’m not sure how to invest the money. I’ve always been a good saver, but I’ve never had this much money. I’m looking for some guidance on how to invest this money for the long-term. How much can I expect to make from investing this money?
Here are some details of my situation:
- I’m 35 years old and single
- I earn around $75,000
- I currently contribute $500 a month to my RRSP
- no money in a TFSA
- I don’t want to invest in real estate
- I don’t mind paying broker fees, but I do want to be conscience of investment fees
- the amount I’m receiving is around $200k
- I plan on using the funds for my eventual retirement (let’s say 65)
Before I give you some of my thoughts please note that none of the information above should be constituted as financial advice and you should engage a financial professional before acting on any investing advice.
Now that we have this out of the way, let me try and answer your question.
I think the best answer to your question is not rooted in any specific investment advice or investment vehicles, but rather the actual benefits of long-term investments and the related benefits of compounding returns.
The great news is that you will have a significant amount of time to let your investments grow before you’ll need assess to the capital before retirement.
Assuming you choose to invest the capital in the stock market (I’m making this assumption based on your email) we can make a few general assumptions based on historical figures. Over long periods of time the stock market is a great vehicle for investing and has returned generous returns for those that maintain a long-term and disciplined approach. One of the challenges that most new investors face is 1) the amount of investment information available online can be overwhelming and 2) what to invest in initially can be daunting.
Considering your comments about professional management fees you seem like someone that would benefit from a competent investment advisor or financial planner. You’ll need to sit down and review your specific situation with this individual to properly plan for your investments, however I can give you some context on what to expect based on some assumptions.
If we assume a conservative 5% rate of return (lower than historical stock market returns over a long-term period) on your $200,000 and also assuming $500 is added to your retirement savings each year you should expect the following (based on historical rates of return):
As you can see from the graph above your $200,000 invested plus $500 per month will grow to a staggering $1,270,000 in 30 years. That’s the power of long-term compounded investing.
Now, although we would never advocate chasing higher returns by taking on more systemic risk if we revise the figures slightly to reflect the actual long-term rate of historical stock market returns to 7% your retirement capital increases significantly:
By adjusting the rate of return to actual historical averages you will reach retirement with $2,100,000 in savings.
Note that these calculations are only simple representations and will vary significantly based on actual return results, taxation (RRSP versus non-RRSP account investing) and monthly contributions. We can’t forget that past returns are not indicative of future results.
However, it should be very clear form the figures above that investing money over the long-term has the potential to significantly increase your wealth with very little effort at all. The most challenging part for most will be to stick with the investment plan over the long-term and not deviate based on emotion, personal spending patterns or market conditions.
I received over $300k from my grandfather early in the year and I expect to inherit over $1M in the next 25 years. I’ve had conversations with my parents about the inheritance and maybe setting up trusts for the extra $1M.
I don’t have any kids at the moment but me and my spouse are likely going to have kids in the next few years. Would setting up trusts for me and my future kids make sense?