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What would you do if you won a million dollars?

Peter Switzer
3 November 2023

Last night one lucky Sydneysider won $20 million in Powerball and 20 lucky Melbourne residents picked up a tick over a million each when its syndicate pocketed another $20 million. In case this is your plan to get wealthy, the chances of winning the big Powerball prize are slim — you have a 1 in 134,490,400 chance of pulling it off!

It certainly should make you think about a better strategy to get wealthier! But it’s great news for the lucky winners in Sydney and Melbourne. So, what should they do with their newfound riches?

More on that in a moment, but let me ask you this: do you think these wins make people happier than most? The experts say no! A Ted-Ed video refers to a famous academic study of 22 lottery winners that showed that months after winning, their happiness had shrunk down to be no happier than a control group of people who’d never won the lottery. (https://www.youtube.com/watch?v=juO4zxsjSjw)

 They say because of a thing called the Hedonic Treadmill, we get happy with the big win but eventually our default emotional state prevails and the happiness gain from a big win dissipates.

The $20 million winner needs a good accountant and a trustworthy financial adviser because their life has changed forever. There are tax, super and investment rules and strategies that should be used to make sure that $20 million keeps delivering at least $1 million a year of after-tax income. Done right, that person will never have a money problem.

Done wrong, they could lose the lot!

For the $1 million winners, getting accounting and financial planning advice also makes sense, especially if the winners aren’t good with money. However, there are plenty of smart money moves to think about.

Let me list them:

  1. Pay off your home loan and no longer bankroll the big profits of banks.
  2. Buy a property. If it will be your principal property you live in, that will be a great long-term investment as there’s no capital gain tax on your home if you sell it. If it will be an investment property, you can borrow more and use the tax system to get tax deductions that makes buying a dearer house achievable.
  3. Put $330,000 into super in one go and if you are a couple, you can wack $660,000 into super and then three years later you can do it again.
  4. If you want income from the million now rather than locking it up in super, a good investment strategy should, on average over a decade, deliver $70,000 a year, which could be good for adding to your normal income or good for doing nothing and preserving the million dollars.
  5. And finally, you could do what I call the patient person’s long-term play. First, you put the million into four term deposits of $250,000 each, so you get the government-guarantee if anything goes wrong with the bank you lend to. You should get around 5%, so there’s $50,000 a year. But you will pay tax, and with inflation around 5%, you aren’t making much. You then wait for the next market crash. Then you break your term deposits, which will cost you, but you buy the best companies in Australia at bargain basement prices.

This chart of Vanguard’s Australian share fund (VAS), which has our top 300 companies in it, shows how the market rebounds after a crash.

Vanguard Australian Shares Index ETF (VAS)

This shows the big crash of stocks when the Coronavirus led to a global lockdown. VAS crashed 32% in a few weeks, but it then rebounded 60% by August 2021. That’s a 60% gain in 17 months, which is a big reward for patience.

The trick with this play is to have cash when markets crash and not being exposed to falling share prices, but that’s really hard to time. The old maxim of investing is that it’s more rewarding spending time in the market rather than trying to time the market, and history bears that out.

However, if you start your investing life after a crash and then spend a lot of time in the market you will be better off than someone who joined the market at the end of a stock market cycle and has the exact same investments.

Making money better than term deposits isn’t easy, which is why a lot of people use advisers to help them. But with really good education on money, you can do it yourself.

That said, good trustworthy advice is worth paying for and it can be tax deductible, which shows you that the ATO can be your friend.

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© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
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