Financial Planning

How to Manage a Financial Windfall

These five steps can help you transform sudden wealth into enduring wealth.

When it comes to big windfalls, all the news headlines are about mega-lotteries and whopping contracts for professional athletes. Yet the typical experience of sudden wealth is quieter: an inheritance, a legal settlement due to divorce or injury, the sale of a business or other concentrated investment or an insurance payout.

Regardless of the source, the abrupt appearance of a significant amount of money carries tremendous implications—and the psychological impacts on your life can be profound.

I’ve worked with many clients who have successfully navigated the challenges sudden wealth can pose. My suggestions for those new to this territory are distilled here into five important steps for building a solid foundation and charting an enduring long-term direction.

Keep calm and take the time to plan

Step one is to take a deep breath. Slow down. Don’t veer from the course of your everyday life—yet. You’ll have plenty of time to enjoy the benefits of having a financial cushion. Your initial excitement might prompt you to make financially imprudent decisions, which often happens to people in this situation. Instead, take the time to think about your needs, commitments and goals. Dream. Picture the life you’d like to create for yourself over the next decade and beyond.

Step two involves launching yourself into a defined time frame. Set a timeline for developing a plan for managing your windfall. And stick to it. Some people become frozen and do nothing—overwhelmed by the prospect of wealth. Others make decisions too quickly, before they’ve had time to digest their full impact. A good yardstick for developing your timeline is six months.

Gather a team of trusted advisers

Unless you’re already adept at managing a significant-sized portfolio and tackling tax issues, you’ll need to secure professional help.

Step three is finding a team of trusted advisers to help you make informed decisions. With most financial windfalls come issues of tax liabilities. You’ll want to work with a reputable CPA who can calculate how big a tax bill you’ll owe. Many people are surprised at how much a tax bite can reduce what’s left of an inheritance or other payout. Now is also the time to consider consulting with an estate attorney on legacy planning, as well as an insurance agent to advise on risk protection strategies.

To find the right professionals, it’s always a good move to get referrals from people you trust. Take the time to interview them to find the best fit with your values and needs. Importantly, this includes finding an experienced wealth adviser with whom you can establish great rapport. I discuss this in greater detail in 10 Questions to Ask When Choosing a Financial Adviser.

Here’s what we always preach to our clients: It’s critical to bring your advisers together, so that everyone follows your directives. All advisers must be on the same page in recommending best steps in implementing your goals. This goes for estate planning, investing, tax accounting, charitable giving and insurance. I’d recommend getting everyone in the same room at some point in the process.

Get yourself into A+ financial health

Step four involves managing both your investments (assets) and your spending (liabilities). When thinking about your goals, set aside a cash reserve to cover the next three to nine months—depending on the stability of your job or income sources. You should be setting aside money to account for your windfall’s tax liability; you may want to consider charitable donations to offset those taxes. And be sure to pay off any outstanding debts.

I mentioned hiring advisers early into this process. That’s because, in addition to planning for tax consequences, your wealth adviser should be reviewing how your new assets are currently invested. Depending on the market environment and other factors, how your money is allocated may be posing undue risk. For example, perhaps you’ve inherited a big block of a parent’s company stock—or sold a family business. Concentrated assets should be placed into a more diversified portfolio of investments.

Make sure you get the investment education you need from your adviser. Understanding investing basics, along with the role your adviser will play, will be important in helping you to set reasonable expectations for your new wealth.

Your future, your way

Step five is the process of making your dreams a reality. With thoughtful planning, your financial windfall can potentially provide you with the opportunity to reshape your future—and, should you wish it, make a lasting positive impact on the lives of others.

In working alongside clients who’ve received significant windfalls, we always dedicate serious time and energy in exploring their values and their passions, as well as their responsibilities and worries—an investment that’s priceless. This is your time to set priorities. Everything should be on the table for consideration: If it matters to you, it should be part of the planning process.

Many who experience sudden wealth find it helpful to talk with others who have contended with similar issues. Your wealth adviser should be able to connect you with other clients who could provide a useful perspective.

It’s essential that you gain a realistic picture of the impacts of inflation and projected expenses on your future spending needs. Your adviser can help you estimate what your actual life expenses will look like in the coming decades before you make any major purchases. Think: medical inflation, tuition inflation for your kids and/or grandkids, shortfalls in your parents’ retirement savings—all the promises that you intend to keep.

Some people receive a large financial settlement as a result of a severe injury, which may require decades of costly medical care. You need to work with experienced professionals who can help you plan for every contingency.

Your life may indeed have changed. But it’s in your power to manage that change, and shape it the way you want. With patience and careful planning, your fledgling wealth could last well beyond your lifetime.

Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove, based in Long Beach, CA. Russ specializes in investing, financial planning and longevity-awareness solutions.

About the Author

Russ Hill CFP®, AIFA®

CEO and Chairman, Halbert Hargrove Global Advisors LLC

Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove Global Advisors LLC, an independent registered advisory firm based in Long Beach, CA. He has led the firm for more than 40 years, specializing in investing, financial planning and longevity-awareness solutions. Russ is heavily involved with Stanford University's Center on Longevity, and has helped to launch the Center's symposiums and Design Challenges on aging-related challenges.

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