The best way to invest $500k

What is the best way to invest $500k?

You can invest $500k in dividend companies or in safe indexes like the S&P 500 for growth. Traditionally, the S&P 500 has returned 10% on average which allows you to withdraw 4% annually in retirement. Alternatively, you can invest in dividend companies and live on the cash payments.

Imagine, living on your $500k portfolio or investing $500k to finally reach one million dollars.

Investing $500k can change your life!

Luckily for you, I’ll show you how to invest a lump sum or live on your portfolio forever. I’ll show you what you can expect for returns and where you might want to invest. Regardless, $500k is a life changing amount of money!

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Can you live off $500k?

It is possible to live off of a $500,000 stock portfolio using the 4% withdrawal rule or investing in dividends. Depending on your strategy, a $500,000 portfolio will earn you between $20,000 and $50,000 per year. Retirees can always use location arbitrage to live in a low cost of living area or country to stretch their money.

The 4% rule assumes that you can withdraw 4% of your stock portfolio and make it last 30 years. Therefore, you would be withdrawing $20,000 per year while the stock market continued to increase. 

Essentially, indexes like the S&P 500 have historically produced annualized returns of around 10%. Therefore, you can withdraw 4% knowing that the S&P 500 has typically increased at a faster rate.

Dividend portfolios can provide you with income without touching your initial investment principle. You could invest in dividend stocks, Real Estate Investment Trusts, Business Development Companies, or covered call exchange traded funds. These assets will continue to pay you for being a shareholder.

For example, you could build a portfolio with an average dividend yield of 7%. Therefore, investing $500,000 would give you a salary of $35k.

Some people like to take advantage of location arbitrage. Location arbitrage is living in a low cost of living area or country where your dollar goes further. An example would be living in Thailand where it only costs around $1,500 per month to live.

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How much interest does $500,000 earn a year?

Traditional Investments like the S&P 500 have an annualized return of 10%. Therefore, it is safe to assume a $500,000 portfolio should be able to return $50,000 in interest. Keep in mind, 10% is an average, so some years will be better than others.

Just because your investments earned $50,000 doesn’t mean you should spend $50,000. Ideally, that money is getting reinvested to allow for further growth. The 4% withdrawal rule allows for living on some of your investment gains while allowing for investment growth.

So what if you’re not happy with earning $50,000 on average? The only way to earn more money is to invest more or find an asset that has a better return on investment.

Instead, you could invest $600,000 which would now earn you around $60,000 on average. Sometimes this means working a little bit longer to let your Investment Portfolio grow.

Alternatively, you can always find a better return on investment. finding a better return on investment usually means taking on more risk or being more active in your investment. For example, you can invest in real estate which has better returns but now you’re managing a property.

What will $500k be worth in 10 years?

$500,000 will be worth 1.1 million dollars in 10 years assuming an 8% return on investment. $500k in cash will lose purchasing power due to inflation, which the Federal government tries to maintain at 2% each year. Therefore, 500k will be 82% of it’s value in 10 years, requiring you to have $609k for the same purchasing power.

As you can see, you should invest in order to keep up with inflation. Keeping $500,000 in cash will cause you to lose purchasing power over time.

What is the best investment for $500k?

The most reliable investment has been the S&P 500 which has annualized returns of 10%. Therefore, growth investors should consider investing $500,000 into the S&P 500 for long-term Investments.  Income investors may wish to purchase dividend stocks, business development companies, or covered call exchange traded funds.

Investing $500k for growth 

The most reliable way to invest $500,000 for growth is the S&P 500. The S&P 500 has historically received annualized returns of 10%. Therefore, invest in the S&P 500 by using a low-cost exchange-traded fund like VOO.

Alternatively, you can invest in growth funds based on company size. Vanguard also offers a small cap, mid cap, and large cap growth funds if you want to be more specific. Small cap funds have a higher growth potential than large-cap funds.

You can also invest in sector specific exchange-traded funds if you are feeling particularly bullish. For example, you can invest in the technology sector ETF as many people feel tech is the future. 

Investing $500k for income

You can invest $500,000 for income by investing in dividend paying stocks, business development companies, and covered call exchange-traded funds. These assets pay a high dividend yield which can pay income in retirement.

Most income investors I want you to live off of dividend payments. Therefore, having a smaller balance of $500,000 is usually looking for a higher yield to live on.

Some dividend stocks between 5 and 10%. Dividend investors may wait for share prices to drop of their favorite dividend companies to get higher yields.Some companies already pay high dividends, such as AT&T’s 7% dividend yield.

Business development companies are required to pay 90% of their earnings back to shareholders. As a result, you can often find BDC’s that pay a substantial yield. For example, ARCC pays an 8% dividend yield.

Covered call exchange-traded funds sell options against the particular index like the NASDAQ or S&P 500. As a result, investors are giving upside potential for income.

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Summary: The best way to invest $500k

As you can see, there are many ways to invest $500,000. You can invest as an income investor or growth investor. You can live on your $500,000 investment through dividend payments or using the 4% withdrawal rule.

Some investors may want to live in another country or area with a lower cost of living. Living in a lower cost of living area or country allows you to have more purchasing power. Rather than living with living expenses of $5,000 or more, you might be able to live on $1,500.

Most investors should expect annualized returns of 10%. 10% return on investment is typically the benchmark because the S&P 500 has historically returned 10% ROI. 

At this point, you should decide if you want to be an income investor or growth investor. Growth investing has more volatility, but can grow your portfolio rapidly. Dividend investing is relatively stable as long as the companies don’t cut their dividend payments. 

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.