Key Takeaways:
A sudden windfall can disappear fast, so your first move should be to park the money safely and avoid big decisions until you have a plan.
Use the windfall to strengthen your foundation by paying down high-interest debt, building a 3–6 month emergency fund, and confirming your retirement and college goals are on track.
Coordinate with a financial planner, tax advisor, and estate attorney to plan for taxes, protect the money, and align any giving or family support with your long-term priorities.
Have you ever dreamed of winning the lottery or inheriting a large sum of money? Most people have. Yet, riches that fall into our hands can sometimes quickly slip through our fingers.
One study found that one-third of the people who received an inheritance had negative savings within two years of the event. 1
Alex Lasarev grew up in a modest household. Thanks to her frugal mother, she inherited over $1 million as a teenager. But a lifestyle filled with luxury and bad investments drained her fortune, and financially, she ended up back where she started.2
Maureen O’Conner married the founder of Jack in the Box. His passing left her with an inheritance valued at over $50 million. But a series of unfortunate events left her destitute.3
“Dishonest money dwindles away, but whoever gathers money little by little makes it grow,” according to the Book of Proverbs. While a windfall need not be viewed as ‘dishonest money,’ the wisdom from the proverb serves as a warning that a sudden inflow of cash can quickly disappear if proper planning is shunned.
Over the next decade, millennials are expected to inherit $68 trillion, according to a 2019 study by Coldwell Banker. While the actual amount will vary wildly, a 2015 HSBC survey suggested that the average inheritance will run about $177,000.
And there are other ways you might come into a large sum all at once. The sale of a property, the settlement of a lawsuit, a year-end bonus, and yes, a winning lottery ticket can create unexpected riches that can enhance your overall well-being--or turn into an unexpected nightmare.
How to manage and sustain your windfall
The advice we provide is always tailored to your specific goals and circumstances. What we recommend to one individual or couple isn’t always the counsel we provide to someone else. But there are time-tested financial principles that are the foundation of the advice we provide. The recommendations below are general and are based on long-term data and our experience.
First things first: don’t do anything
That’s right, do nothing. Place the funds in a safe short-term account such as a money market or savings account. This reduces the temptation to make a big purchase that you may come to regret. It will also give you the time and space to develop a sound financial plan that meets shorter-term and longer-term needs and goals.
Get help from a financial planner
We are always available to entertain your questions and ideas. We’ll assist you in making any adjustments that incorporate the windfall into your financial plan and plug any shortfalls. We also suggest a tax advisor or CPA, who will help you navigate the tax code and estimate any taxes due. Further, an estate planning attorney will help you create an estate plan.
Pay down or pay off debt
As you develop a plan, consider paying down debt. Do you have credit card debt? Are some of your loans at high rates? If so, consider wiping out that debt. You’ll feel an enormous sense of satisfaction in eliminating burdensome liabilities.
Bulk up your rainy day fund
It’s a great idea to knock out debt, but emergency reserves are an important component of your financial foundation, too. We typically recommend three to six months of living expenses that you can easily access.
Let’s visit your retirement
Are you on track to comfortably retire? According to the Federal Reserve, only half of American families have a retirement account4. Making sure you have enough for retirement is one of the pillars of a sound financial plan. If possible, max out your IRA or 401(k). The earlier you contribute, the greater the power of compounded growth, but it’s never too late to start. If you have children, college savings plans are an ideal way to help them pay for the cost of higher education.
Tax time
Did you sell a large property that will incur a capital gain? What are the federal and local taxes that might be due? A conversation with your tax advisor is in order so that you can set aside funds to pay the government. Getting caught flat-footed at tax time is something you want to avoid.
Support causes that are important to you
Your windfall gives you the freedom to help others. It may also decrease your tax liability. Consider giving directly or through a donor-advised fund. But be leery of friends or family members who warm to you after your newfound wealth or those who present business ideas to you. Having a trusted team of advisors can help you weigh the pros and cons of offers that suddenly come your way.
Take care of yourself
There is nothing wrong with spending a little bit of money on yourself. Earmark some of your windfall for fun. It may be a short vacation getaway or a few toys that enhance the enjoyment of your hobby. Just be careful you don’t turn one small expenditure into a series of splurges that whittle away at your windfall.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
1 The 2015 Study was conductedby Jay Zagorsky, an economist and research scientist at The Ohio State University in Columbus, Ohio and was based on survey data from the Federal Reserve and a National Longitudinal Survey funded by the Bureau of Labor Statistics.
2,3 As reported in the article “These People Inherited Fortunes — Then Blew Them All Away,”
published February 17, 2021 on GoBankingRates.com.
4According to aSurvey of Consumer Finances, 1989 – 2019.
John Gigliello, CFP®
John Gigliello, CFP®, is a fee-based fiduciary financial planner in Albany, NY, serving individuals age 50+ with comprehensive planning and investment management, centered around proactive and advanced tax planning. John earned a Certificate in Financial Planning from Boston University and, more recently, successfully completed the rigorous CFP® Certification examination to become a CERTIFIED FINANCIAL PLANNER™. John earned the Accredited Investment Fiduciary® Designation from the Center for Fiduciary Studies®, the standards-setting body for Fi360. The AIF® designation signifies specialized knowledge of fiduciary responsibility and the ability to implement policies and procedures that meet a defined standard of care. John currently serves on the Albany County Investment Advisory Board, having been appointed by a unanimous vote of the County Legislature in January 2019. In this position, John advises the county on a strategy for making the best use of money available for investment.