The best way to invest $200,000 lump sum (Inheritance or Windfall)

What is the best way to invest $200,000 lump sum inheritance or windfall?

The best ways to invest $200k is in a long-term growth or cash flowing investment. Traditionally, the S&P 500 is one of the most reliable investments for long-term success. You can choose to invest the lump sum at once or use down cost averaging to average into the market.

Imagine, investing a lump sum inheritance safely and in alignment with your own retirement strategy. Investing a lump sum can give your investments a big kickstart.

You just need to know how you’re going to invest.

Luckily for you, I’m going to show you different ways to invest a large lump sum of $200k or more. I’ll show you how to invest for growth, income, or in real estate. You just have to determine which strategy works best for you.

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Is $200k a lot of money?

A $200k lump sum is considered a lot of money. $200k is 3-4 times the average household income in the United States. The average person at retirement age has around $200k in retirement savings despite the recommended savings amount being higher. Investing $200k can significantly reduce your time to retirement.

The typical household income in the United States is around $63,000. Therefore, the average American household has to work 3.2 years to earn $200k before taxes. 

Getting a windfall of $200k doesn’t just reduce your working career by 3.2 years. You can retire early by investing your lump sum. Now, your invested money makes you money faster through compounding interest.

For example, let’s assume you’re 30 years old without any retirement savings. You want to retire on $1,000,000. Contributing $675 every month at 8% return on investment would yield you $1,000,000 in 30 years.

Now, assume you’re 30 years old and you invest your $200k lump sum and contribute $675 per month. You can now retire with $1,000,000 in 17 years, retiring 13 years sooner because of your initial investment!

$200k can be a big financial boost. Most retirees only have around $200k saved for retirement. Investing a lump sum now can ensure you have more money at retirement age.

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How to invest $200k

You can invest $200k for growth, income generation, or a mix of both. The longer your investment timeline, the longer your money will have to compound. You can invest your lump sum all at once or average into the market via down cost averaging.

The key to investing your $200k is to invest it for the long-term. At 8% ROI, the future value of $200k is $244k in 10 years, $785k in 20 years, and nearly $2.2 million in 30 years. You could easily become a millionaire by investing your lump sum.

Asset mix

Growth investors are looking for the price of the asset to increase. You might buy a share of stock at $100 today, which could be worth $200 in seven years. Growth investing is popular among young investors looking to maximize returns.

Income investors are looking to generate cash flow. The price of the stock could go up or down, but the company pays a dividend on a consistent basis. Income investing is typically ideal for those looking to receive a steady paycheck without selling their investments.

Some investors have a healthy mix of both growth and income investments. Mixing your investments can help protect against volatile market conditions. For example, growth stocks might be down but your income investments continue to pay dividends.

Investing lump sum all at once vs. down cost averaging

A long-term outlook is the best approach to investing $200k. Having a long-term mindset will allow you to invest your lump sum all at once, because you’re not concerned with day to day market fluctuations. Over time, the market should go up, which means your $200k should as well.

However, some people would prefer to down cost average. Down cost averaging is dividing your $200k into equal sums to invest over time.

For example, here’s a hypothetical example of the difference between down cost averaging and lump sum investing.

Price of the Market Value of your $200k lump sum investment (investing all at once) Value of investing $200k over 12 months (Investing $16,667 per month)
$100 $200k $16,667
$90 $180k $31,667
$80 $160k $44,815
$75 $150k $58,681
$85 $170k $83,172
$110 $220k $124,302
$105 $210k $135,319
$103 $206k $149,408
$107 $214k $171,878
$115 $230k $201,395
$110 $220k $209,306
$118 $236 $241,195

As you can see, the end result in this scenario is relatively similar. The down cost averager was able to buy shares cheaper when the market dropped, but they also bought high as the market rose in price.

Had the market shot straight up in price, the lump sum investor would have come out ahead. However, a dropping market would cause the down cost averager to buy at a lower price point. You can’t predict what the market is going to do, so choose the strategy that works for you.

How to invest $200k for growth

Investing $200k for growth is best done through low-cost index funds like the S&P 500. The S&P 500 has been a reliable investment with an average annualized return around 10%. Alternatively, you can invest in a total stock market ETF or growth funds in small, mid, or large cap.

Most beginners would do well investing in the S&P 500 ETF like VOO. The S&P 500 is the top 500 companies in the United States, so you know you’re getting a quality group of companies. As stated, the S&P 500 has continued to produce positive returns and is seen as reliable.

You can also choose to invest in a total stock market ETF, like VTI. A total stock market ETF invests in the overall stock market, but is usually weighted based on market cap. Therefore, the majority of your fund will be S&P 500, plus a bunch of other companies making a small portion.

Some investors will invest in small, mid, or large cap specific growth funds. Small-cap are smaller companies, while large-cap are big companies like Johnson and Johnson. For example, you could invest ⅓ of your funds in VBK (small cap), ⅓ in VOT (mid cap), and ⅓ in VV (large cap).

Personally, I recommend sticking with Vanguard ETFs because of the low-expense ratio. Expense ratio is the fee you’ll be charged for investing in each fund. You’ll be hard to find anything else that can compete with the cost.

Where to invest $200k now for income

The best places to invest for income include covered call ETFs, business development companies (BDCs), and High Dividend Yield ETFs. Investing for income often means sacrificing capital gains. However, dividend investing can be a good way to reduce volatility in the market.

Investing for income can be seen as riskier than investing for growth to some people. As an income investor, you’re giving up share price growth for a set income return. For example, the S&P 500 could go up 20% this year, but your income investment might only pay you 10%.

Covered call ETFs are income investments where a fund manager writes options against an underlying index, like the S&P 500. QYLD, RYLD, XYLD, NUSI, and JEPI are all examples of covered call ETFs. The price remains relatively stable because the funds are 100% options, so they’re all yield and no gains.

Alternatively, you could invest in something like QYLG or XYLG where only 50% of the fund is in options. Therefore, half of your money is income generating while the other half sees capital gains.

Business development companies like ARCC or MAIN invest in businesses. BDCs loan money to companies too big for individual investors, but not big enough to be listed on the stock market. BDCs are required by law to return the majority of the profits back to investors as a dividend.

Alternatively, you can invest in High Dividend Yield ETFs, like VYM. Dividend ETFs typically pay a dividend yield between 3-5% and see good growth.

How to invest $200k in real estate

You can invest $200k in real estate by buying property yourself or investing in Real Estate Investment Trusts (REITs). Investing in property can be time consuming, so investors might need a property manager. REITs are ideal because you’re buying shares of companies who invest in real estate.

How long can you live on 200k?

According to the Trinity study, you should be able to withdraw 4% of your investments each year for living expenses. Therefore, a growth investor should be able to live on an $8k salary with $200k invested, which isn’t much. An income investor can be paid $20k per year with a 10% dividend yield investment.

Dividend investing is one of the best strategies for living on your investments. You don’t have to worry if the market is up or down, but you get paid for owning companies. A $200k investment in QYLD currently pays nearly 12% ROI or $24k per year.

How much interest will $200,000 earn in a year?

The S&P 500 has an average annualized return of 10%. Therefore, the interest of $200k invested in an S&P 500 fund would yield around $20k per year. 

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Summary: Invest $200k lump sum (e.g. Inheritance or Windfall)

As you can see, there are plenty of ways to invest your $200k lump sum. You can invest in growth or dividend paying assets. Investments can be done all at once or you can average into the market through down cost averaging.

The first step is to choose your asset mix. Will you prefer to invest for growth potential or income investing? Growth has the potential for better returns over a long period of time, but income provides a steady paycheck.

Growth investors should look into the S&P 500 or a total stock market fund. You can even get growth funds depending on company size (e.g. small, mid, or large cap). Typically, the S&P 500 has been a reliable source of investing for most investors.

Dividend investors can invest in covered call ETFs, BDCs, or high dividend yield ETFs. You can try picking your own individual dividend stocks, but it’s not recommended for beginners.

As a growth investor, you can expect a salary around $8k per year with a $200k investment. A dividend investor can make a 10% ROI with covered calls and earn $20k per year.