‘I don’t come from money’: I received $1.2 million after a family tragedy. Am I foolish to keep it in a money-market account?

“I am looking for suggestions on what type of investment strategies I should be looking at.” (Photo subject is a model.) - Getty Images

Dear Quentin,

I’m in my early 30s. There was a tragedy in my family, which resulted in me receiving a large sum of money.

I do not come from money and having a large sum just sitting there freaks me out. I settled on moving these funds to a money-market account with a guaranteed return. I am more comfortable with having this money now and I have a better support system — one that I trust.

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I have $1.2 million sitting in a money-market account. It has been earning a guaranteed 4.5% monthly. My adviser has reached out to say that that percentage will drop significantly in the next month or so due to the end of the 12-month entry period.

Each month, I have been living better because of the interest. I would like to continue this each month, depending on the market, without touching the core investment. I am looking for suggestions on what type of investment strategies I should be looking at. Perhaps a CD ladder?

Novice Investor

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Dear Novice,

Being a novice should not restrict your investment choices.

I don’t want your lack of knowledge about investing to prevent you from turning this money into a pot of gold upon your retirement. I understand that you have a low risk tolerance, but the more you learn, the higher your tolerance will be. The financial world can be obtuse and unfriendly to beginners, but that’s why columns like this exist. Ultimately, I want you to feel empowered enough to make your own decisions, with some oversight from your financial adviser.

Typical money-market rates are closer to 2% to 3%, although they can be higher in some online banks, so you’re getting a good rate (for as long as it lasts). At 3%, you would earn about $36,000 a year or $3,000 a month. That’s a lot less than the $54,0000 a year you’ve been earning thus far. Understandably, you’ve been handed a warm and cuddly puppy dog with a 4.5% return, and you’re reluctant to hand it back. That’s the price of an introductory rate.

As your experience with managing this money grows, look beyond a monthly income and think about the long-term picture. That is, your retirement, and how you can make this money work for you. It would mean remaining employed and using part of your principal to invest in the stock market, and enduring the ups and downs over the next 20-plus years. Assuming a 10% return S&P 500 SPX historical average, investing half of this money ($600,000) would be worth $4 million in 20 years with dividends reinvested.

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CD ladders and savings accounts

CDs are investment vehicles with set rates that attract people like you looking for safe havens. CD rates track the federal-funds rate. After the Federal Reserve cut the benchmark rate by a quarter-percentage point, it’s now in the range of 4.0% to 4.25%. In September, you can get rates of up to 4.4%, down from 5.25% this time last year. CD ladders allow you to buy 1-, 2-, 3-, 4- and 5-year CDs, so you have one maturing every year.

There is one important difference between CDs and high-yield savings accounts: The latter are more liquid, meaning you can take your money out more easily. Typically, withdrawals are limited to half a dozen per month. With CDs, you are committing to a set period of time. But interest rates can change with high-yield savings accounts — even after you deposit your money —  based on the Fed’s benchmark rate. When you buy a CD, the rate does not change.

As you’ve likely seen with headline-grabbing special offers that often come with many restrictions, there is competition between financial institutions for CDs, and people like your good self with over $1 million to invest. Their job is to get your business and retain you as a client. Don’t get bamboozled by banks or credit unions offering CDs at high rates. They are often offered as “loss leaders.”

In other words, they are special offers and only allow you to deposit a limited amount of money for a limited time. To qualify for high rates or special offers, credit unions typically require a “field of membership,” with terms including that you are a customer, affiliated with a specific organization and living in the state where the institution is based. You did well to find a money-market fund with a generous interest rate. But, like all good things, that’s soon coming to an end. Now you must look elsewhere.

Looking beyond CDs and high-yield savings accounts, explore short-term money-market instruments, Treasury bills and high-yield savings accounts and CDs. Given your low risk, high-quality fixed income and Treasuries typically perform well during rate-cutting cycles. A lot depends on your time horizon. For longer-term investments, look at equities, fixed income and sectors like real estate that have suffered in recent times due to high interest rates.

Choosing a financial adviser

You should know whether your financial adviser is a fiduciary or whether they’re receiving commissions for the decisions they make on your behalf. Some money managers are fiduciaries — professionals who have to act in their clients’ best interest under the Investment Advisers Act of 1940. Your current and/or future adviser should be a member of the Financial Industry Regulatory Authority (Finra). Certified financial planners have similar codes of ethics.

The National Association of Personal Finance Advisors could also be helpful in your investing journey. Finra has rules to help ensure the protection of investors. There is, for better or for worse, a difference between outright fraud, misconduct and negligence. Some examples of the latter include unsuitable investments, failure to disclose important information and overconcentration of investments.

From what you say, it appears you would be comfortable diversifying your $1.2 million into CDs, Treasuries and/or money-market funds with stocks for longer-term savings. The idea is for your money to make money in retirement so you can use this runway — the next 30 years before you finish work and claim Social Security — to build a nest egg. You have two big things in your favor: a large sum of money at a relatively young age.

Your future looks bright and, all going well, prosperous.

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‘I don’t come from money’: I received $1.2 million after a family tragedy. Am I foolish to keep it in a money-market account?

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