Handling a financial windfall might seem as easy as pie. After all, whether the sudden bounty is expected, in the form of an inheritance or the sale of a business, or unexpected, in the form of a lottery ticket, it can help turn dreams into realities, virtually at the snap of your fingers.
The outcome may prove otherwise. Windfalls have been known to create massive anxieties over how to allocate the money, where to focus your energies and how to deal with potential jealousies from friends or family members.
"This is a question that a lot of people will face as baby boomers age and money is passed to the next generation," says Jonathan Rivard, an advisor at Edward Jones in Richmond Hill, Ont. "Typically, a lot of millennials will be faced with important decisions. Like, 'What will I do with the house I've inherited that could be worth $1 million-plus? And what about dealing with these RRSPs?' There are major decisions to make."
The stress levels could be higher than most people are prepared for. "I've seen instances where people become nervous wrecks after getting a big inheritance," observes Tina Tehranchian, a senior financial planner at Richmond Hill-based Assante Capital Management Ltd. "You would think they would be the happiest people because now they have nothing to worry about. But some people feel very anxious about mismanaging the money. What if they lose it? What if they don't know what to do with the money? They lose sleep over it."
Once, recalls Tehranchian, a beneficiary of an estate needed five years to get over the anxiety of dealing with a multi-million-dollar inheritance. "Nobody in her social circle had that kind of money," says Tehranchian. "Suddenly, she was catapulted into a different category of wealth, compared to her peers. Sometimes, it created jealousies and animosities toward her -- and it led to all sorts of insecurities."
Put simply, a windfall can change your life virtually overnight. Yet there are steps you can take, to bring your life and your windfall under control, rather than the other way around. What follows are recommendations by financial experts on ways to handle a windfall.
- Take a deep breath and take your time before rushing to make any decisions, says Tehranchian. "Every person is different. Some people believe they are stewards of the money and want to leave it in trust for the next generation." For others, she adds, a windfall offers the freedom to do things that were previously unaffordable. "It can open a lot of doors. But think about your goals. When you get a windfall it demands an update of your financial plan, because your circumstances have changed dramatically. It's important to get advice, and the right kind of advice," says Tehranchian. If you happen to be in a low-income bracket, for instance, it's advisable to consult a planner who is familiar with strategies for wealthy clients.
- A referral from a lawyer or accountant is one way to find an advisor who is experienced with handling larger accounts. Alternatively, search the Financial Planning Standards Council's website, to find an advisor in your community. Moreover, says Rivard, it's useful to interview several advisors so that you can find someone you are comfortable with. "Make sure you are dealing with someone who offers transparency, clarity and a written plan."
- If the windfall is seven figures in size or significant enough to be life-altering, you might also consider talking to a psychologist to help deal with the social pressures, says Ted Rechtshaffen, president and CEO of Toronto-based TriDelta Financial. "The reason for this is you will be tested by society if you come into a lot of money. Everybody and their brother will look to you for help. 'Come invest in my company.' 'Aren't we family?' That kind of thing. That's why you want to spend some time determining, 'What's most important to me? What makes me happy or does not make me happy?'" Rechtshaffen points to the stories of lottery winners and high-priced athletes who gave in to emotion and squandered their new-found wealth only to become miserable. Their problems arose because they did not take stock of what they wanted to achieve and follow up with a well-thought-out plan.
- Addressing five key issues will make the process more manageable, says Rivard. First, what is your financial situation today? Second, where do you want to go? For instance, are you concerned about paying off debt? Or will the windfall impact your retirement goals? Third, can you achieve your goals in a realistic manner? Fourth, what steps do you need to take to accomplish your goals? And, fifth, how will you stay on track? "If you analyze those factors it will really help prioritize your goals," says Rivard. "Is it about retirement savings, or assisting kids and grandkids? Is it about charitable giving? This process will help determine your goals -- and make sure that you're not blowing the money on a depreciating asset, like a sports car, that will just make you feel good in the short term."
- Arriving at an updated financial plan, says Rechtshaffen, should encompass how much of the windfall that you want to spend, your tax situation, and how much you want to give away to a charitable cause or family members. "It should cover the basics, such as ensuring that you don't outlive your money. But even if you received a lot of money, you need to have the discipline to make sure you don't become another statistic like the lottery winners or athletes who went bankrupt."
- Tehranchian recommends creating several budgets to meet different needs. One budget should cover costs to live comfortably and perhaps at a higher level than previously. Another budget should focus on retirement. Then there are so-called survivorship scenarios to meet your spouse's needs if you die suddenly. "Based on the new asset base we can do the analysis to see how much should be allocated to lifestyle needs, retirement and life insurance and so on. You have to do a budget for each scenario and make sure that it meets your priorities."
- If you lack the discipline and willingness to manage your investments, then an annuity could be suitable because it provides a guaranteed income stream. "Life annuities make sense for people who are spendthrifts and likely to squander the money," says Tehranchian. "If you are worried about this, you may want to put up with the inflexibility of an annuity and lack of access to the capital. It may be a good thing for some people." However, this route is not recommended, says Rivard, if you are willing and capable of investing your money alongside a professional advisor. "You may want the liquidity and like the fact that you can pick the investments."
