What would you do if you received a major financial windfall? Would you buy a new house or vacation home, give some to your family members, donate to your favorite charity, or take the trip(s) that you have always dreamed about?While most people will not receive a major financial windfall during their lives, it is not uncommon. You might receive a financial windfall by:
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So, You Just Received a Financial Windfall
What would you do if you received a major financial windfall? Would you buy a new house or vacation home, give some to your family members, donate to your favorite charity, or take the trip(s) that you have always dreamed about?
While most people will not receive a major financial windfall during their lives, it is not uncommon. You might receive a financial windfall by:
• Selling your company
• Getting a large inheritance
• Receiving a legal settlement due to divorce or injury
• Earning a big payout from employer stock compensation
• Signing a mega contract as a professional athlete or artist
• Winning the lottery
So, while receiving a financial windfall may sound really great, the real issue is that a sudden appearance of a large amount of money can have significant impacts on your life. Financial windfalls can bring financial freedom, but along with that freedom comes many types of stresses and challenges. For example, according to the National Endowment for Financial Education (NAFE), an estimated 70% of people who receive a financial windfall won’t have any left within a few years.1
However, handled properly, receiving a financial windfall can be a huge boost and help you achieve many if not most of the financial goals that you have for you, your family and beyond. So, let’s take a look at some of the issues you might face by receiving a financial windfall. Then, let’s look at how you, or others like your children, can effectively navigate through the pitfalls and challenges that realizing sudden wealth presents so that you can best realize the potential that your financial windfall has given you.
Five Pitfalls of Sudden Wealth
Recipients of sudden wealth face many traps and challenges that can quickly deplete or eliminate their newfound wealth. One of the major keys to preserving your newfound wealth is to avoid traps and manage challenges like the ones below:
1. Sudden wealth can take an emotional toll: This can happen in so many different ways. For a business owner who sold their business that they worked so hard and took many years to build, there is often a loss of sense of purpose and identity after the business is sold. People receiving an inheritance can be conflicted between wanting to use the money for things that they feel are important, but also may want to honor the deceased relative by not touching the money they were given. Also, family members or friends might call on you for a financial need just because you now have the money.
2. Giving away too much money. Often when someone receives a financial windfall, they are approached many different people who are looking for money for various reasons. It could be for donations for a favorite charity. Or, it could be a relative, a friend, or a past co-worker or employee looking for a loan or funds to start a new business. My experience with clients giving loans or investing in new businesses in these situations is that they almost never get their money back. If you give or loan too much of your wealth away before understanding the real impact, you may erode your wealth faster than you had anticipated.
3. Nonchalant or extravagant spending. Treating yourself is fine, but in many cases people who receive sudden wealth treat that money differently and spend it more frivolously than if they had earned it. If the money needs to last a long time, excessive spending can jeopardize your financial future. The key is to be discerning between what is truly important to your long-term goals and what is not.
4. Choosing the wrong professional advisors. After receiving a windfall, there likely will be many people seeking to help you manage your investments and help you with your other planning needs. Equally likely is that many of these potential advisors don’t have the skills to meet your needs. In order to get the right professionals on your team, it is always a good idea to get referrals from people you trust. Take the time to interview them in order to find the best fit with your values, goals and needs.
5. Potential Lawsuits. Your newfound wealth can make you a magnet for potential unwarranted lawsuits. You can address this in several ways, first by working with your insurance carrier to make sure you have appropriate specific insurance coverages including umbrella liability coverage in place. Next, by working with your advisor team, you can work to build legal and other barriers between potential litigants and your wealth that will discourage potential lawsuits and protect yourself in the event a lawsuit arises.
Realizing the potential
If you, a family member, or someone else you know is somehow fortunate enough to receive a financial windfall, below are four steps that we recommend taking to help you best realize its potential positive impact.
• Take your time. Catch your breath. Don’t make any unnecessary or rushed decisions. There is and will be time for all the decisions that you need to make. Because receiving a financial windfall brings with it a wide range of new issues, things to think about, and emotions, it is best for you to slow down and work through these things in order to think clearly about your windfall and its impact.
• Envision your future. First, make a timeframe for yourself during which you will be able to think long term and develop a clear vision of what you want to do for yourself, your family, and others in this world. This period can vary, but 6-9 months would be a good starting point to consider. Sticking to this timeframe is important if you want to develop a sustainable long-term plan and avoid the pitfalls that you may be facing. So, make a wish list and try to get as clear as possible regarding what you would like for your future. Understand the assets, investments, and liabilities that you currently have. This will be very helpful when working with your own team of trusted advisors which you will develop in the next step.
• Complete your team of trusted advisors. Because your financial situation will have changed significantly, it is important that you have a team of experts that can help you plan and execute your vision for the future. Along with your Atlanta Financial advisor, your team should include a CPA, estate planning attorney, and possibly a property/casualty insurance expert. You want to work with true experts—people who have experience working with people like you and who are able to help you chart a financial course that matches your needs and wants. When working with your advisor team, it is very important that you bring them all together with you when building your initial plan, and then on a periodic basis. This ensures that everyone is on the same page, and that there is agreement among your advisor team regarding the steps that you should be taking. Moving forward, your team can act as a sounding board and help you think through different situations and ideas you might have as they arise.
• Make decisions and put your plan in place. Once you have your professional team in place, you should work with them to develop a plan that best fits your goals relative to the windfall that you received. This plan should be realistic in terms of how much you will be able to spend and should reflect your values and your goals along with things you want to do for your loved ones and others. Your plan should also address the things that you and your advisors are concerned about. Once your plan is in place, to make your windfall work best for you, you need to continue to be self-aware of your overall situation, be disciplined with your life-long spending habits, and, while consulting with Atlanta Financial and the rest of your advisor team, make intelligent and informed decisions.
Receiving a major financial windfall can give you and your family financial security and provide you opportunities you never thought you might have. To help set yourself up for success and avoid the pitfalls, contact your Atlanta Financial advisor, and we can help you follow the steps above to help you best realize the potential lifelong benefits your new windfall has given you.
1 8 Smart Ways to Handle a Financial Windfall, Alert Investor Staff, www.finra.org October 27, 2015
When I first sit down with prospective new clients to learn about their finances, one of the most common issues we come across is how spread out investment accounts are. We may have a brokerage account here, an IRA there and, very often, an old 401(K) or two still sitting in a previous employer’s plan. There are plenty of reasons why a 401(K) may be left behind with a prior employer – it could have gotten lost in the shuffle of beginning a new job, it may have just seemed like too much of a hassle to move the plan, or perhaps you took the time to roll the plan into an IRA but your employer made subsequent contributions you didn’t know about. These accounts, affectionately referred to as “orphans,” are becoming more and more common given the increasing frequency of job-hopping, especially among Millennials. So, who do these orphan accounts belong to and more importantly, what can be done about them?
When Congress passed the recent $1.5 trillion tax bill (The Tax Cuts and Jobs Act or TCJA), it triggered the first comprehensive revamp of the U.S. tax code in more than three decades. As we prepare to file our 2018 tax returns, Americans will feel the effects of this legislation for the first time. For most, the effects will be positive. In fact, 80% of Americans will see their taxes drop. However, not all the news is good. There will be inevitable surprises as 2018 taxes are filed with one particularly nasty “gotcha” that will likely catch many taxpayers off guard.
I was recently asked by a cousin during a New Year’s Day lunch conversation, “If you had to name the one key to starting a good financial plan at my age, what would it be?” My reply came without hesitation – “Margin.”
To provide context as to how the question arose, he and his wife are in their late 20’s. They married fairly young, have already survived some incredibly difficult life events together, purchased their first home, adopted two dogs, and are now expecting their first child. He understands the value of a dollar, the meaning of hard work, and is, quite frankly, one of the most principled men I know. So, what he was really asking was simply this: If we are looking to REALLY start getting our act together financially, and begin to put ourselves on a path to build wealth, where should we start? By the look on his face, my cousin was expecting something quite different in response, but quickly caught on to what I meant as we continued to chat.