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Recent Inheritance or Other Windfall?    Thumbnail

Recent Inheritance or Other Windfall?

I got a call last week from Esmeralda*.  She is a relative of a client and recently inherited some money and wanted some advice on what to do with it.

Over the years, I have received similar calls.  Sometimes it was an inheritance, sometimes a very large bonus or company stock, and even a few lottery winners.

For the sake of what to do with the money, my answer is usually the same.  (Apart from possible tax implications that might affect one over another).

I asked Esmeralda if she had any thoughts on what she would like to do with this money.   

“Well, I’d like to help out my three adult kids and my three grandchildren.”

In most cases, this response is a common theme.  

You know when you are on a plane, and the flight attendant says, “Put your oxygen mask on first before helping others”.  I wonder how many have actually taken that advice.

I think most of us want to help our family if we are able and an inheritance or other windfall is the perfect opportunity to do so.

Here at Financial Planning Solutions, when we prepare a comprehensive financial plan for our clients, we focus on the entire picture.  A holistic approach if you will.  If we look at only one piece, we could jeopardize the rest of the plan.

Many years ago, a woman came to see me who had won the MA lottery years before.   Back then, I don’t think one had the option of a lump sum payout but rather equal installments over twenty years.

She had received eight payments so far and had twelve remaining.  I remember she was receiving about $90,000 after taxes were being withheld each year.  Some simple math meant; she would be getting about $1,000,000 more after taxes.  A pretty tidy sum.

What was interesting to me, was she had very little savings, didn’t own a home, and had no other real assets or investments.  How could that be?  She received about 700k so far with nothing material to show for it.  This concerned her (And I remember being pretty curious on what happened to all that money).

She was single, had no kids, but had several nieces and nephews and friends. She told me that she gave money each year to her friends and family and went on some pretty expensive vacations each year.

I explained that it didn’t help to go back (since we can’t) but suggested we put a financial plan in place going forward to help ensure that she would be in a better place financially.

I came up with what I thought was a good plan.  We agreed she would save $60,000 a year over the next twelve years and spend $30,000 a year as she saw fit.  In twelve years, following this plan, she could accumulate approximately $1,000,000**.  Since at this point, she was still under a normal retirement age, there was the opportunity for this $1,000,000 to potentially grow further before she retired.

I know if some of my clients were in the same position, they would save all of it each year, but everyone is different so one’s financial plan must align with that person.

For this lottery winner,  after our discussion, I thought this was a good compromise.

As you might have guessed, this woman did not follow the plan.  She just couldn’t stop giving the money away.  I recommended she see a therapist to try to understand her actions better.  Twenty odd years ago, I wasn't as well versed in Behavioral Finance.

We lost touch so I’m not sure what ever happened. Hopefully, she got a better understanding of her relationship with money.

Back to Esmeralda and that holistic planning idea.  If she indeed is currently saving enough now to fund her short, mid, and long term goals of things like travel, having an emergency fund, putting away enough toward retirement, funding her kids college educations, and whatever else is important to her, than great.

Most people aren’t in that position and that is okay.  That is what the comprehensive financial plan was designed to do.  Get you on the right path to achieve all your goals. Once we know the basics are covered, then one can dream a bit and have some extra fun, give some away, buy a house, start a business, take that trip around the world, etc.

Having the financial plan is like putting that oxygen mask on first.

So, if you come into money, what should you do?

Here are five initial steps:

                  1.  Park the money somewhere safe before doing anything

This is not an “investment”.  This is in something safe that can’t lose value.

                  2.   Taxes

If there are taxes to pay, I suggest having a CPA® or CFP® practitioner help you figure that out and set that money aside.  The taxes are due whether you save it all or blow it all.  The IRS doesn’t much care either way.

                3.  Don’t give any money away to a person or charity

At least not before having that financial plan completed.

              4.  Do not make any investments, buy anything, etc

See #1

               5.  If winning the lottery, it might be best to set up a trust to receive this windfall.

Do you really want strangers calling you or camping out on your doorstep?

Before making any decisions, it is always best to speak with a Certified Financial Planner™ practitioner to learn what your options are.

Feel free to reach out to me if you have any questions.

By the way, this lottery winner wasn’t the only one that went through the money with little to show for it.  

Click on this link HERE to read about 23 lottery winners who lost millions.   And it is not just exclusive to lottery winners.  The same tragedy can affect anyone who receives a windfall.

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Another blog article you might find of interest is Lump Sum to Invest?"  Click HERE

All the best.

Rick Fingerman, CFP®, CDFA™, CCPS®



*Not her real name

** Purely hypothetical.  I used a 7% return over the 12-year period.  Not a guarantee but merely an illustration.  This return could be less and loss of principal was possible.

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

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