Imagine a young adult, say in their mid-20s, who just won the lottery.  After taxes, the amount in one lump sum comes to a million dollars in 2018.  What is the best strategy for that person?

First, we have all heard the stories of people who won the lottery only to lose all of the money a short time later.  Sometimes the outcome is even worse with drug addictions, ruined relationships, and even suicide.

This is one of the big problems with the lottery.  When the money isn’t really earned, it tends to not be respected.  The person may be entitled to the money because the person put down the money to buy the lottery ticket.  But since the winnings didn’t come from a combination of hard work, creativity, and pleasing customers, the money is not highly regarded.

One of the most popular posts I have ever written is on the HGTV show My Lottery Dream Home.  I shared how some of the lottery winners were taking a large chunk of their winnings to buy a lot more house than needed.  To be fair, I see many lottery winners who are quite conservative with their money but just want a little upgrade in their living conditions.

If you earn your money through hard work, diligent savings, calculated risks, and patience, then you are far more likely to take good care of that money.  You know how much work and effort it took to make the money, so you are not going to easily blow it all.

With that said, let’s go back to the example at hand.  The average lifespan for someone in a first-world country is approaching 80 years old.  For someone in their 20s who is in relatively good health, they could expect to have a decent chance of reaching 90.  That means at least 60 years left of living.

In other words, full-time retirement is probably not an option.  A million dollars isn’t what it used to be, especially if you are living in the United States with expensive health insurance.  Of course, one option to make your money last is to move to a place with a relatively low cost of living, even if that means finding a less developed country on the other side of the planet.

If you could invest the million dollars and earn a 4% return after inflation, then you are only looking at $40,000 per year before taxes.  While some people could make this work, it wouldn’t be a very comfortable lifestyle.  And that budget will quickly vanish if you introduce children into the equation.

You may think that 4% seems low for a return, but it may actually be too high.  If price inflation is running at 3% per year, then you would really need to earn 7% on your money.  And if you invest aggressively into stocks, then one market crash of 50% is going to wipe out any plans of retirement.

If I were counseling someone in their mid-20s who just won a million dollars, I would recommend being relatively conservative with it.  I would recommend that at least half of it go into something similar to a permanent portfolio.

If the real estate market were not too expensive at that time, then paying cash for a house would be a decent use of some of the money, as long as the house is basic enough.  In an average cost of living area in the U.S., I wouldn’t pay more than $200,000 for a home, unless you have children and need the space.

If you spent $200,000 on a house, then you wouldn’t have this money to invest.  But, you also wouldn’t have a mortgage payment.  You would just have the taxes, insurance, utilities, and other expenses that go with owning a home.  But you could ideally cut your monthly expenses by at least $1,000 per month by owning the house outright.

If you have a permanent portfolio and you buy a house outright, then I would slightly lessen the allocation towards bonds in the permanent portfolio.  Instead of 25% in long-term government bonds, I would cut it back to maybe 15 to 20 percent.  The reason is that paying for a house (and not taking a mortgage) is somewhat of a hedge against deflation in itself.  If you currently have a mortgage at 4% interest, then any extra money you pay towards the principal is essentially locking in that 4% rate.  As you pay off the mortgage, you are shifting from an inflation hedge to a deflation hedge.

And that brings us to investment real estate.  For the person who wins a million dollars in early adulthood, I think investment real estate still provides a good opportunity for long-term investing, as long as you aren’t buying at the height of a bubble.  I know that the wisdom on the street is to take out a loan and let the tenants pay off the mortgage.  You can also write off the interest expense.  But for someone with so much money at a young age, I think it is wise to be conservative and not use the leverage.  You can buy a property for $150,000 and net $1,000 per month (just as an example).  This is likely a better and less risky return than what you will find in stocks.

Also, for investment real estate – and this goes for anyone – I would not recommend buying really expensive properties.  Generally speaking, they don’t make good rentals.  It is better to not put all of your eggs in one basket.  I would rather see someone buy three properties at $150,000 each than buy one property at $450,000.

And lastly, we need to address the whole idea of retirement.  Generally, I don’t think it is a good idea to retire early in life, if at all.  There is a difference between being financially free (the option to retire) and early retirement.

But not retiring early does not mean misery.  It doesn’t mean you have to go to your cubicle job five days a week.  You can be productive in many ways now, especially with the internet.

And that is one of the beauties of having a nice nest egg to start.  If you are in your mid-20s with a million dollars, you should use the opportunity to invest in yourself and learn new skills.  Of course, this could be said for someone without a million dollars too, but someone who doesn’t have to go to a 9 to 5 job Monday through Friday has a real opportunity for personal growth.  Imagine how much you could learn about website building or internet marketing if you spent 40 hours per week studying it.

And for someone in this situation, it would be easy to do something where you have passion and can still make some extra side money to supplement your investment income.

Now, what would you do if you won a million dollars?

Take your answer, and do it anyway.  You probably don’t need a million dollars to do it.