You’ve heard this cautionary tale before: a lucky soul inherits a new wealth – from the lottery, from family, from fame – only to squander it before their retirement. A sudden influx of wealth can be both an incredibly joyous and stressful experience. In fact, there’s even a stress-related disorder known as “Sudden Wealth Syndrome” that can come with newfound wealth.
If you’re the fortunate recipient of sudden wealth, we urge you to consider these strategies to help manage your wealth responsibly.
Evaluate Your Situation and Set Goals
First, consider just how much money you’ve actually come into before making any major life decisions (i.e. quitting your job). Don’t let your new money turn you into an impulse spender. You’ll need to consider your current and future needs before your desires, and answering these questions can help you do that:
- Do you have any debt?
- Is your current income enough to support you?
- Will you be paying for your children’s education?
- Do you need to improve your retirement savings?
- Are you planning on buying a home? Are you still paying off your home?
- Are you considering giving to a charity?
- Are you planning on supporting other loved ones?
- Can you minimize and income or estate taxes?
It can be overwhelming to try and come up with answers to these questions all at once. Times like these are when knowledgeable financial professionals are crucial. If you don’t already have a good, comprehensive financial planner, an accountant, or an attorney, this is the time to find them.
Develop a Comprehensive Financial Plan
Many financial organizations claim they provide comprehensive financial plans, but you may just be getting a plan that’s no more customized than it is for any of their other customers. In some cases, this standardization isn’t necessarily a bad thing – it can create highly efficient portfolios that match an investor’s risk tolerance and long term needs. But with your new wealth, you’ll need more than purely investment help. With your sudden wealth, your advisor should be able to also give you guidance with your taxes, estate plan, education planning, and charitable giving.
Be Cautious of Family and Friends
This is the time when estranged family and friends seem to be coming out of the woodwork. It’s an unfortunately occurrence, but a common one nonetheless. Some people will choose to direct all requests for money to their advisor, which can act as a good buffer between you and the family member. For the family you do want to share your wealth with, you’ll need to think about the capability of your beneficiaries. For example, if you want to leave money to minor children, you may consider setting up a trust to protect the assets and control when they receive the funds.
Wait to Make Big Purchases
Before making any big purchases, make sure you have taken care of your new taxes on the sudden gain, paid down your debts, and evaluated how much you need to bolster your retirement savings. Really consider your new wealth and responsibilities you have taking care of the next generation.
Coming into a large sum of money can be a wonderful thing, but it comes with many responsibilities that you may not be ready for. We highly recommend working with a knowledgeable financial advisor that can guide you through making the most of your good fortune.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Walsh & Associates and LPL Financial do not provide legal or tax services.