How should I invest my R28m lotto winnings?

Congratulations on your winnings! I am glad to see that you took the sensible approach and let the money ‘rest’ a bit before you started applying it. Receiving a large amount of cash can be very traumatising and the psychological effect it has on a person does not always have a positive outcome …

Your question is very simple, but I am afraid that the answer is more complex. Your winnings can be considered in the same light as someone who inherited a large sum of money or anyone who came into money in one way or the other.

In many ways, my answer also applies to people who retire and receive large amounts of cash.

Instead of considering how and where best to invest the money and how to structure the investment to provide an income, I suggest that you start off by focusing on the following.

1. Protection

Don’t invest in get-rich-quick schemes. If promises and returns sound too good to be true, they probably are.

Be careful of private ‘business deals’ or partnerships. Before you enter into any agreement, consult a commercial lawyer unless the ‘deal’ is from a reliable source. Pay the fee, and secure your money!

Consider creating a trust. Consult with a certified financial planner (CFP) to establish how this can be done and gain an understanding of the workings of a trust. Do it right from the beginning.

A trust will also ensure that your trustees can assist and guide you with financial and investment decisions.

Nominate your trustees based on their skills, not because they are your buddies.

Protect your wealth and estate through comprehensive professional financial planning. These funds can be the catalyst of your lifelong financial freedom. It can also be like a watering can with a hole at the bottom. Most lottery winners have no money left.

2. Estate planning and tax planning

As it stands your estate will pay 20% estate duty on your winnings (and all assets bought with your winnings) in the event of your death. Income tax will be levied on interest earned in your name and the name of your estate should you die.

Your investment portfolio must be tax efficient. Invest the amount you earn as taxable income – such as interest and rental income from investments in real estate investment trusts (Reits) and direct property – in a retirement annuity (RA).

The RA contribution will neutralise tax. Avoid life-wrapped RAs, they are notoriously expensive! In fact, insurance-based investments are generally more expensive than unit trust-based investments, exchange-traded funds (ETFs) and direct shares.

Make sure you have an up-to-date will and negotiate the executor fees. The 3.5% plus Vat executor fee is not statutory, it is listed as the maximum fee allowed.

Be careful what you invest in and the structure you invest in. Anything that can be deemed to derive income (such as rental property) will be subject to an additional 6% plus Vat executor fee.

3. Needs, wants, and wishes

Take some time and think about what you need in your day-to-day life, such as accommodation, food, medical aid and transport. Then move on to your wants such as owning a home rather than renting or buying a car instead of riding a motorcycle. Your wishes could include a nice house on a mountain, a sports car, or an overseas holiday every year.

The above will determine your financial plan.

Divide your wealth into pots that cater for immediate expenses (needs), expenses over the next three to five years (wants) and long-term expenses (wishes). Dream about what you want and plan to make it happen.

4. Investment strategy

The structure of your investment portfolio should be determined by whether you decide to leave SA or not and how much you intend to draw from your investment as income. Do you intend to work to earn an income as well?

Considering the amount of your investment you should comfortably be able to draw around R65 000 per month based on a 3% drawdown rate.

If you retain the 3% of investment value, the funds should last for the rest of your life.

Your investment strategy must link to your needs, wants, and wishes mentioned above. Each one of the three requirements should have its own investment strategy that suits the respective objective.

Don’t aim for maximum returns. Aim for adequate returns to achieve each objective. Be realistic with your return expectations, and if your objectives prove to be unattainable lower the bar a bit.

Diversify! Take a healthy chunk of your wealth directly offshore. Diversify your investment portfolio to gain exposure to all asset classes globally.

Remember the main objective of investing – to beat inflation! I want to add: ‘But don’t lose your boots in the process.’

Determine the difference between investing and speculating.

Buying well-known company shares globally and keeping them for a long time is investing. Buying cryptocurrency and going to the casino is speculating and gambling.

Your investment term should never be less than five years (preferably longer) when investing in growth assets. If you need funds in less than three years do not invest in growth assets since the value may be less than when you originally invested.

That is not bad, it is just how long-term investments work.

5. Professional team

I highly recommend that you identify a ‘squad’ of professionals that includes an attorney, an accountant/tax consultant, and a CFP. These three parties will be instrumental in assisting you with future financial decisions.

Good luck with your decisions and with your wealth. You are welcome to contact me should you wish to discuss the above in more detail.

Happy investing!