There is a massive wealth transfer underway. By some estimates $68 Trillion will be passed down by aging Americans to their heirs and beneficiaries over the next twenty-five years. You may be one of these lucky heirs. Or you may be fortunate enough to receive a financial windfall another way. Perhaps through stock options, a legal settlement, a large bonus, or maybe even a winning lotto ticket.
In most cases, receiving a windfall can be life changing. But before you rush out and buy your new dream home or Ferrari, there are a few simple, yet powerful, steps you can take that can ensure you make the right financial decisions. Afterall, you don’t want to end up as another Rags to Riches to Rags statistic. Let’s face it, it’s far too easy to fall victim to your spend-a-holic tendencies. Most especially after receiving a giant pile of free money.
Statistics show that far too many winfall recipients allow their spending to spiral out of control, only to end up broke after a few short years. By slowing down, getting professional advice, establishing a financial plan, controlling your urge to give, and investing in your future, you can put safeguards in place to make the most out of your windfall.
With that, here are five proven windfall techniques according to financial planners:
1. Let the Windfall Burn a Hole in Your Pocket
When you receive a huge windfall, suddenly there’s so much to buy, and so little time to buy it! Most of us immediately get busy thinking about all the wonderful things money can buy: dream houses, fast cars, five star vacations, etc. Finally, we can keep up with the Jones! These are possessions and experiences you’ve dreamed about, but have been out of reach for your entire life. Therefore, the temptation scratch that spending itch can be overwhelming.
Many financial planners say that when you receive a large financial windfall, you should commit to a Black Out Period. This is a time when no serious purchases or financial commitments are to be made. There is often lots of emotion accompanying a windfall. Emotions such as euphoria or grief (if it the windfall was the result of losing someone close to you – aka an inheritance) are quite common.
Taking a breather can give you the space you need to come to terms with this newfound wealth. The prescribed length of the black out period should be no less than six months and perhaps as long as two years. This depends upon the size of the windfall and the complexity of the assets involved.
It is recommended that during this period, you maintain your lifestyle as it existed pre-windfall. This means there’s no quitting your job, no crazy purchases, and no charitable donations (including to friends and family). The Black Out period is a time to focus on the next four items on this list. This way you can set yourself up for the best possible outcomes personally, financially, and emotionally.
The windfall of great riches can, if mismanaged, make things worse, not better for the recipients.
– Michael Mandelbaum
2. Build a Strong Advisory Team
Good advice will be the most important thing you spend your windfall money on. A strong team with your fiduciary interest at heart will help you establish the right financial plan. It will be geared toward your goals, steer you away from dubious financial “opportunities”, keep you in the taxman’s good graces, and insure your assets.
It’s not how much money you make, but how much you keep, how hard it works for you, and how many generations you keep it for.
– Robert Kiyosaki, Rich Dad Poor Dad
Your team should consist of a Certified Public Accountant (CPA), Certified Financial Planner (CFP), Estate Attorney, and Insurance Broker. Often accompanying large windfalls are taxes. Your CPA will help you navigate these waters and keep you compliant over the long haul while actively working to mitigate your overall tax burden.
The CFP will work with you to create a long-term management strategy to get the most out of your windfall. In other words, this financial expert put your money to work for you.
Your Estate Attorney will help you set up your living trust, will, Advance Health Care Directive (in the event you become incapacitated), and other important legal structures to protect you and your assets. Most importantly, done properly, a trust will keep your estate from winding up in probate court.
Lastly, understanding which items you need to insure, and which insurance products are necessary to protect you, your assets, and your heirs is a critical and oft overlooked aspect of estate planning. With these four experts on your team, you are ready to move to the next step.
3. Create a Strong Financial Plan
The reason so many people squander their windfalls is due to lack of planning. They mistakenly believe their newfound fortune is limitless. This is why after assembling your financial team, you will work with them to create a solid plan. The plan will help manage and hopefully grow your nest egg. There are five important parts to a solid financial plan:
- Expenses – setting up your budget and performing cash flow projections
- Investing – this is where you pick an investment profile and strategy. Do you wish to grow your principal, pursue capital preservation, invest for income, some combination of the above?
- Protection – insurance policies to protect you against lawsuits, natural disasters, accidents, etc
- Debt Management – how you manage debt and minimize interest costs
- Tax Planning – keeps you compliant with federal, state, and local taxes and mitigates tax burdens wherever possible
During this process, your team will work with you to determine your financial goals. Would you like to buy a house, make charitable donations, set up a scholarship, pay off your debts, gift money to friends or family? Your CPA will determine any ‘gift taxes’ due when gifting money. She will also help you with any relevant filings to disclose gifts and pay any taxes due. Yes, if you gift enough money, YOU have to pay taxes on those gifts!
Your team will help you understand how much you’ll be able to spend on a monthly/annual basis. They’ll inform you whether you have enough to retire early. And they’ll set up asset allocations determined by your cash flow requirements, appetite for risk, and a whole lot more.
Spending money on the right team is not an expense. It’s an investment that will pay dividends as your nest egg grows. It will ensure you are able to enjoy your windfall secure in the knowledge that it’ll be there for you so long as you operate within the established plan and review that plan with your team at least annually.
4. Be Wary of Long-Lost “Friends”
Win it and they will come. Word of your newfound fortune will travel fast even if you do your best to keep it quiet. It goes without saying that flashy Instagram and Tic Toc posts only serve to accelerate your personal news cycle. These are highly discouraged if you’d like to keep a lid on your inheritance or lotto winnings.
As news of your windfall spreads, you may find that all sorts of old friends and long-lost relatives come out of the woodwork. While some may only wish to offer you heartfelt congratulations, others will have an eye on your money. The latter group may approach you hand out spinning hard luck stories or selling “no-lose” business opportunities, but make no mistake, there’s only one reason they’ve turned up after all these years.
Here is where you will get additional leverage from your financial team. You can use them as a sounding board for any business opportunities your ‘friends’ pitch you and blame them anytime you have to say ‘no’ (they won’t mind, in fact, that’s their job!).
This team will also keep you informed as to how much you can afford to giveaway, to whom, and in what increments over a specified period of time. They will help to temper any feelings of guilt that may compel you to give money away and be the logical Yin to your emotional Yang.
5. Invest Your Windfall For Your Future
If you would like to enjoy the fruits of your financial windfall for the balance of your life, you’ll need to look beyond stuffing all that cash in a mattress or stashing it in a low yield savings account. This is where your Certified Financial Planner earns their money. This professional will work with you to set up IRAs, 529 education savings plans, income streams, opportunistic growth investments, stock and bond portfolios, real-estate holdings, generation skipping trusts, and more.
It’s imperative that you not only resist blowing your wad on a lavish Kardashian lifestyle, but that you invest it so that it provides needed cashflow and potentially principal growth over time that outpaces inflation. It is also very important that this be done within your risk tolerance and budgetary needs. Invest first, spend later. In other words, put your money to work for you so you and enjoy the fruits of its labor later, and hopefully, so can future generations.
Sometimes the poorest man leaves his children the richest inheritance.
-Ruth E. Renkel
