From Forbes —
By E. Napoletano, Contributor —
According to a recent study by Cerulli Associates, there’s a massive transfer of wealth poised to happen in the U.S. over the next 25 years. An estimated $68 trillion will change hands, with the country’s aging population transferring those assets to charitable endeavors and their heirs.
While “wealth” is something that looks different for everyone, a sudden influx of assets will undoubtedly have an impact on your life and goals. The good news is that you can plan for an impending financial windfall today so you’ll be prepared in the years to come.
The following eight tips can help you manage a financial windfall of any size—from an inheritance or other source—with confidence.
Take a breath
When a financial windfall comes along, there are two possible scenarios: You’ve likely suffered a personal loss or won a substantial sum of cash through something like a contest or lottery. Whatever shape your windfall takes, a wise first step is to take a breath.
Either of these scenarios is accompanied by intense emotions. Both grief and joy can influence the decisions you make with your incoming assets. A moment of pause can prevent hasty decisions that seem like good ideas in the moment and also save you from regret later.
Ask for help
Many people tend to think only about how they’ll spend a windfall. They forget or are unaware that their windfall comes with some logistical hurdles. Taxes, legal requirements and potential long-term impacts on their financial life (like changing tax brackets) must be taken into consideration.
To help manage a windfall, you need to have experienced professionals on your side. These professionals should have worked with clients who have had similar significant influxes of cash or assets. Here are some professionals you might consider working with and how they could potentially help:
- Certified Public Accountant (CPA) or tax advisor. To help protect your new assets and create a tax strategy for the present year and years to come.
- Financial planner. To create a plan to pay down debts, invest your assets and save for you and your family’s future.
- Estate planning attorney. To create an estate plan that considers your windfall assets.
The number of professionals you may need will depend on the type of windfall and the amount. As you choose these professionals, keep in mind that you should both like and respect the people on your financial team. It’s also perfectly reasonable to ask prospective advisors for references.
Beware long-lost friends
Sudden influxes of cash can turn up long-lost friends and family members. These people might have an eye on reestablishing ties to get to your money. Sometimes these people may have been excluded from an inheritance. Other times, people may have seen your name in the news, especially if your windfall comes from newfound celebrity status, a contest or a lottery win.
While it can be exciting to hear words of congratulations and have time to reconnect with people from yesteryear, be wary if they lead to conversations with asks for cash. Having a trusted team of financial professionals can help you weigh any potential asks for money—from loans, to gifts and investment opportunities.
Be clear about your goals
How you plan to save your windfall is just as important as how you plan to spend it.
As you meet with potential advisors, it’s essential to know what you’d like to achieve with your financial windfall. From paying down debt to funding a family member’s college education, don’t be shy about telling your team what you want to accomplish with your cash and other assets.
Make a list of your top financial goals. If possible, rank them in order of importance. Then, as you home in on the ideal advisors for your team, you’ll be able to ask targeted questions regarding how each professional proposes to help you reach those goals. These professionals also will be able to help you better manage your windfall when you’re able to have a conversation that relates specifically to your goals.
There are no right or wrong goals for managing a financial windfall. Keep in mind, however, that you can splurge on savings and make strategic spending splurges, too.
Reduce your debt
A wise rule of thumb for any financial windfall is to chart a course that helps you pay down or pay off your debts, not to acquire new ones. Paying down debt can increase your monthly cash flow and give you even more fuel for achieving your goals.
Work with your financial team to create a plan to clear existing debts off your plate. Financial windfalls can help alleviate the pressure that substantial, ongoing obligations may have placed on you, including student loans and mortgage or credit card debt.
Some windfalls come along in a lump-sum disbursement, making it simple to pay off a large chunk of debt at once. If you receive your windfall in installments, you may want to use a debt paydown plan like the debt avalanche or debt snowball methods to reduce your debt over time.
Invest for retirement
No matter how old you are when you receive a financial windfall, you can make that money work toward securing your future. With even a few years to let compounding interest work its magic, you can grow a single windfall into a longer-term benefit.
One option is to fund an individual retirement account, or IRA. By maxing out your retirement fund contributions each year, you can harness the power of compound interest to fund your future. For example, if you were to add $6,000 each year to a traditional IRA, with a conservative annual return of 6%, after 20 years, you could have a nest egg of $239,956.
Work with your financial team to make sure you’re maxing out all of your possible retirement savings options and that you’re investing in the optimal account types for your financial and risk profiles.
Keep that day job
It’s certainly tempting to walk away from the 9-to-5 grind, but staying employed is a smart long-term tactic to preserve your windfall. There are a couple reasons not to tell your day job farewell.
First, it’s easy to underestimate the amount of money you’d need to invest to take the place of your income. To replace a $50,000 annual salary indefinitely, using a conservative retirement-planning calculation, would require a nest egg of nearly $1.7 million.
Next, quitting your day job means your Social Security contributions stop. If your investments experience a downturn, you might need to rely on income from your Social Security payments to make up for market losses.
If you genuinely can’t stand your current vocation, however, a financial windfall can offer the breathing room to help you pause and decide what’s next in your career. You can create a plan to leave behind a career you never enjoyed, while charting a path for your new career.
Make it last
Receiving a windfall is only the beginning. Be sure to take the time to invest in yourself. Together with your new financial team, you can make plans to make your good fortune last.
Be sure to set a regular review schedule, so you can assess your progress toward your goals. A regular review process also will help you quickly incorporate life changes into your plans. Whether you have a child, get married or divorced, start a new business or buy a bigger home, a review schedule will help you protect both your family and assets along the way.
At your review meetings, discuss topics such as life and homeowners insurance, college savings, and wills and trusts that might need adjustments and your charitable donation goals. Continued conversations can help detect areas of your plan that require a tune-up and help ensure you’re creating a legacy with the proceeds from your windfall.
You now have eight new must-dos to help you manage a financial windfall. While the tips above might make it feel that a windfall is all about business, there’s undoubtedly joy to be had when you’re on the receiving end of a lifestyle change. However, making a few plans and having trusted people to give you advice will make it easier to both find the fun and budget for it while protecting your newfound wealth.
Contact KM&M CPAs for help
If you need help with your personal or business taxes, contact the experts at Kleshinski, Morrison & Morris, CPAs. Call our office at 419-756-3211, reach us by sending email to email@example.com, or just fill out the contact form on our website at this link.