Successfully Managing A Financial Windfall
We’ve all heard the stories. If not first hand, at least in various news reports and anecdotes.
Some “lucky” person picks the winning numbers, prances before the cameras in what can only be described as a media lovefest, and lives happily ever after, free of financial worries.
OK, the first two points are correct, but the happily ever after doesn’t always materialize. In fact, in most cases, sudden money leaves the winner worse off than prior to their windfall.
Many winners, who aren’t used to managing a large sum of money, mismanage the funds and wreck their lives in the process. As it turns out, it’s a variation on the theme of the Prodigal Son. Only the names and the details change. Of course, odds of winning life-changing cash in a lottery are incredibly low.
We are more likely to be the recipient of an inheritance or an insurance settlement. And it’s the unexpected pile of cash that may create an initial sense of euphoria and a false sense of security.
“The vast majority of people blow through [a financial windfall or inheritance] quickly,” said Jay Zagorsky, an economist and research scientist at The Ohio State University and author of a study on receiving an inheritance.
Whether large or small, it can seem like “play money.” And that is where the danger may lurk. So, that brings us to the next question. What should you do if you happen to be the beneficiary of a financial windfall?
10 steps to creating a firewall around your newfound stash of cash
1. First, do nothing. That’s right, do nothing. The temptation may be to buy a new car, take a luxury cruise, or upgrade your living arrangements. That can begin an unwise cascade of purchases that will likely leave you feeling regret. A suggestion is to wait at least six months before embarking on any life-changing decisions. The time spent waiting and planning allows the “shock” of your newfound wealth to wear off.
Besides, you need to take time to learn exactly what you’ve inherited. Is it all cash? Is it stocks and bonds? Have you just become the owner of a business or real estate?
2. Talk to a trusted advisor. Find someone who has your interests at heart, not his or hers. If you are expecting to receive a windfall or have already received an unexpected inflow of assets, let’s talk and see how we can incorporate it into your overall financial plan.
The suggestions we provide below are basic fundamentals. They may not apply directly to you, but they are common sense tools designed to help you make smart decisions and prevent an expected or unexpected windfall from being squandered.
3. Doing nothing also means not quitting your job. It may be tempting, but lost wages and the lack of social interaction from your coworkers may lead to remorse, even if you don’t especially enjoy your job. Besides, without work, you run the risk of blowing through your money much quicker than you had anticipated.
4. Reduce debt. We’ve always provided a holistic approach to financial planning. Once things have settled down and you have a better understanding of your inheritance, it may be time to pay down or pay off high-interest debt. Once eliminated, you no longer have that onerous outflow of interest payments on your loans.
5. If you don’t have an emergency fund, now is the time. Set aside reserves of at least three to six months' worth of your expenses, preferably the latter. The future can sometimes throw you an unexpected curve ball. Having reserves set aside will reduce your financial stress.
6. Additionally, you may decide to allocate additional funds toward savings and retirement. Again, every one of our clients is unique, with various goals, personal circumstances, and financial resources. What our team recommends for one person may vary significantly from what's best for another.
7. Think about tax and estate planning. No one is sure what may or may not happen to the tax code this year or next. But it’s critical that you get a handle on the tax ramifications of your inheritance in order to maximize the financial benefit.
For example, did you know that you may be required to take distributions if you inherit an IRA? What if you are already taking required mandatory distributions? You see, things can get tricky rapidly, but sound advice can quickly ease any concerns. Additionally, life changes are a great time to update your estate plan, especially if the inheritance increases the complexity of your financial situation.
8. Be cautious. Less-than-reputable salespeople and relatives may suddenly warm up to you, with the unspoken goal of separating you from your cash. That’s why a trusted advisor is critical. If you have a well-thought-out financial plan, it’s much easier to pass on potentially exploitative offers.
9. Consider charitable giving. Do you have a favorite charity? Would you like to help a niece or nephew finance their education? Now is the opportunity to explore the possibility of helping others.
10. Have some fun. There’s nothing wrong with treating yourself. As we provide counsel, we would like to leave some room for self-indulgence. Do you like to travel? Have you thought about an addition to you home, finishing your basement, remodeling your kitchen, or upgrading appliances? Maybe it’s those top-of-the-line golf clubs you’ve been eyeing, or a new car.
Or, maybe you’d like to spend money catching up on the everyday things of life you’ve been putting off. Everyone has a hot button.
With a financial plan in place that manages your windfall, you’ll feel much more secure enjoying the benefits of your wealth without the nagging worries that you might run through your nest egg with not much to show for it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation
After 18 years in the National Football League, the Denver Broncos’ star quarterback, Peyton Manning, is calling it quits after a very successful career. We wish him well and hope that he’s made the preparations needed to enjoy a long, comfortable retirement. If he has, he’ll be in the minority. Research shows that an estimated 60% of retired NFL players go broke within five years of retirement; nearly 16% declare bankruptcy.[i]
Fortunately, there’s a lot that Peyton can do to avoid that fate. While most of us won’t be retiring at 39, retirees still have a lot of the same worries as pro athletes. Here’s the advice we would give Peyton if he were our client and friend.
Congratulations on your retirement! You’ve had an amazing career and I’m glad you got to go out on a high note. I’m excited to see what you have planned next. I also want to give you some advice as you make the transition to retirement. I hope you find it helpful.
1. Don’t Make Any Sudden Decisions
Take some time to process the transition away from a high-octane career and think about what you want out of retirement. Stop and smell the roses for a while and don’t make any major decisions about your future until you feel comfortable with your new phase of life. Many people who come from high-pressure, competitive jobs feel the urge to do something, anything when they retire. You might be tempted to fill the void by rushing into a new business, partnership, or buying expensive toys or real estate. Don’t, just yet.
2. Don’t Jump Into Businesses or Investments You Don’t Understand
As a guy with money, you’re going to be surrounded by people pushing every kind of business, product, and investment there is. Don’t get taken in by the hype; think very carefully before you put your life savings into something you don’t completely understand, especially if the person asking is a friend or relative. Caring about someone doesn’t mean you should put your future at risk. You’ve worked hard to get where you are; don’t threaten it by taking too many risks now. Always remember, anything that sounds too good to be true usually is.
3. Work With A Team of Professionals
As a professional athlete, you’re used to working with the best in your business. Expect the same from your financial team. Don’t just go with the guy you went to school with, the one your buddy works with, or the one offering you the moon.
Talk to a lot of professionals and look for ones who want to get to know you and your dreams before making suggestions, answer your questions honestly, admit to uncertainty, and don’t make a lot of promises. Pick the professionals that are willing to ask you the hard questions and tell you the difficult truths you may not want to hear. Then listen to them.
Let your team be your barrier against hype, promises, information overload, and anyone looking for a handout. Turn to them when you have ideas or questions, or need to talk out a decision.
4. Have A Strategy for Retirement
You’ve got a long retirement ahead of you, one that’s likely to last 40 years or more. Though you’ve amassed a fortune most of us would envy, it’s not going to be enough if you don’t think ahead and make prudent choices. You should be thinking about the lifestyle you can afford in retirement and making sure your money lasts as long as you need it. Have a strategy for good and bad markets and remember that long-term investors have to cultivate patience. Don’t forget about healthcare!
How Can We Help?
Even if you’re not Peyton Manning, most of the advice above still applies. Retirement is a challenging transition and it pays to get it right. We work closely with our clients long before and after retirement to understand their dreams and help create personalized retirement strategies that take them where they want to go. If you, or someone you know, have questions about retirement, give us a call.
Gary Blom & Michael Howell
Blom & Associates
Footnotes, disclosures, and sources:
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.