Is $5 million a life-changing amount of cash?

Five Million Dollars. Sit and look at the words for a moment. You’ll be hard-pressed not to feel like a Bull Mastiff salivating.

Last weekend we gained ten new families with $5 million in lotto winnings. But every day of the week there are Kiwis in this position. Gasp in surprise, but it’s true and it’s common.

One day it will be you. KiwiSaver balances suddenly become available at age 65. No one drip-feeds you the money. It’s there all at once and you’ll need to think like a lotto winner, take advice and protect yourself from family swooping in.

People sell small businesses and farms. Some have retirement portfolios that easily reach $5 million after a professional career. Others have parents who die. A family home can net $5 million in Herne Bay, let alone any rental properties or unused investments.

Our ageing population of baby boomers struggle to de-cumulate assets and will cause many lotto-style wins on their deathbed. There is a tidal wave of inheritance money that will hit Kiwis in the next decade, as well as their own growing retirement funds.

This concept of sudden money is an area some financial advisers specialise in, because receiving a lump sum is as much a psychological game as a financial one.

An old colleague of mine recently wrote a book on the topic, “Sudden Money and How to Handle it”.

Nick Crawford is Auckland based, but in our time he was sorting out large lotto wins in the UK (we are talking the eye watering $90 million type, given the exchange rate 20 years ago). Then there were huge personal injury payouts from lawsuits and whopping inheritances you only see in a country with old money.

As Nick pointed out to me after this weekends division of lotto money, “$5 million is an interesting amount. It’s probably enough for most people to live comfortably and not have to work. However, it’s also the sort of sum that could be spent in 12 months”.

So is it life changing? The short answer is no. It’s an amount you need to be very careful with.

If you are a 40-year-old couple with $5 million you could generate an inflation proof annual income of $190,000 a year until age 90. That’s the amount in your hands after tax and fees and it’s modelled to use up all your capital before you die. It will slowly increase by 2 per cent each year as you age, so you know there’s the same spending power $160,000 has today.

There’s likely to be no inheritance left for kids and no celebratory spend-up when you get the money. It assumes a 60/40 split of shares and bonds and a 50 per cent probability of not running out of cash. It requires regular monitoring and remodelling by an adviser. This is because the portfolio of investments may over-deliver or under-deliver, inflation may change and your annual income must be adjusted at the edges to allow for it.

If you’re a 60-year-old with $5 million, that income is $250,000 a year with the same assumptions and modelling.

Your age with sudden money makes a big difference to what you can do. Having a long-term perspective is a tricky skill to acquire, because very few of us are mathematical modelers with experience in the de-cumulation of assets. Don’t underestimate the value of an adviser.

While lotto wins and wealthy parents aren’t on everyone’s horizon, retirement is. The padlocks suddenly fall off your KiwiSaver fund on your 65th birthday and you are left to your own devices.

Whether it’s $50,000 or $5 million, it’s going to be the largest sum you’ve seen in your life. Pointedly, it needs to see you out and achieve your lifestyle goals.

Nick Crawford advises that we think of the safety briefing on a plane. “In an emergency the advice is always to fit your own oxygen mask first before seeing to children and others in your family”.

“The problem when people give away money in reasonably large amounts is there’s not enough left to achieve their own goals, or they have to take a lot more risk to achieve them”.

Wise words when it comes to sudden lump sums.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.