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Handling a financial windfall

How to answer when money knocks…

By: Mary Grace Braun

A monetary windfall may seem the stuff of daydreams — a winning lottery ticket, an inheritance, or even an insurance settlement — but if life does present these instant riches, what’s the protocol? Buy a new house? Travel the world? Give it to family and friends?

According to the National Endowment for Financial Education (NEFE), as many as 70 percent of Americans who receive a windfall lose it all within a few years. Four of Coronado’s top financial advisors shared tips for prudent planning in the face of good fortune.

Dan Gensler of The Gensler Group asserted, “The first thing the recipient should do is to lay out their goals and objectives. Perhaps they are looking to save some, invest some, and use a portion to buy an asset. Once goals are prioritized, it’s easier to figure out how we can make the money last throughout this person’s lifetime.”

Michael Manning of Manning Wealth Management said it’s vital to work with a team of specialists who are experts in areas such as taxes and estate planning. “Before you start spending, you should first understand what the tax ramifications of the financial windfall are. It’s wise to meet with a CPA to understand how much you need to put aside for taxes. Your advisor may also recommend establishing a trust, if you do not have one already.”

Bless Young of Edward Jones Investments added, “Assuming they already have a trust, I would advise them to meet with their trust attorney so that they have a proper estate plan, and so that their children can draw from the trust when the time comes.

If they don’t have a trust and come into a windfall, they may need a trust attorney so that they can create one. Trusts can also protect assets from the cost of probate (legal documentation), so it would be prudent to set one up.”

If the newfound riches are from a winning lottery ticket, the next crucial decision is whether to take a lump sum payment (the entire amount at once) or an annuity (a series of payments at fixed intervals). Some advisors may recommend an annuity because it prevents spending the entire sum within the first few years. On the other hand, the lump-sum payment can be a good option for those who make wise investments. Charles Hayes of Hayes & Associates said, “I would recommend a lump sum payment because the client has more flexibility in choosing how the money should be allocated.

“Taxes will most likely be higher taking a lump sum, but since you can control how the money will be invested, you will be better off in the long run over an annuity that has a low yield.”

Ask your financial advisor which is most prudent for you, depending on your age and other factors.

According to Young, first things first: “Set aside sufficient funds to cover six months of expenses.” Gensler concurred, “It’s important to have these savings and liquidity to meet the unexpected,” he said. Manning also advised, “Make it a priority to pay off any short-term debt at high interest rates, including credit-card debt or short-term loans.”

Hayes explained the next important step is to evaluate one’s retirement plan, making sure enough money is set aside to live comfortably later in life. “Options may include an employer-regulated 401(k), a Roth IRA or a Traditional IRA — all of which depends largely on your tax situation,” he said.

Young advised, “Providing that the client is eligible, I would recommend a Roth IRA, because it grows tax-free and has more flexibility than a traditional IRA. If they are small business owners with a windfall, I would probably recommend something else, like a SEP (Simplified Employer Pension) or an Owner K (an owner-only 401(k)),” she said. Regardless of the option, Manning said, “The more you set aside earlier on, the better off you will be when you retire.”

And when it’s time to spend, said Gensler, “How you choose to spend your money is discretionary. What’s important to you may not be as important to another person.” But there’s a benefit to being generous: “Donating is a good and smart thing for people to do,” he said. “When you make a charitable contribution, it’s deductible, so there are definitely advantageous tax implications … but make sure your heart is in the charity.”

Young advised that investing is often the way to go. “I would recommend a diversified investment portfolio, divided between fixed-income investments (such as bonds or bond mutual funds) and equities (such as stocks and stock mutual funds). A client’s risk tolerance will determine whether to invest conservatively or aggressively.”

Hayes, who recommended investing in stocks and/or equity mutual funds, believes, “The stock market is absolutely the best vehicle for income.”

Age and financial situation, of course, have a lot to do with the wisest way to handle the windfall. Young explained, “If you’re young and do not yet own a home, you may want to consider using some of the money to buy one. Those in their golden years might want to check some things off their bucket list.”

Manning added, “A lot of people spend all of their newfound money within a few years. My advice to those who are hungry to spend after receiving a financial windfall is this: Treat yourself to something special early on. Maybe it’s a brand new car. But after this reward, focus on how to save and invest your money.”

Michael Manning of Manning Wealth Management
Michael Manning of Manning Wealth Management
Dan Gensler of the Gensler Group
Dan Gensler of the Gensler Group
Charles Hayes (right) and John Hart of Hayes and Associates provide investment advice to their client, Carolyn Crane.
Charles Hayes (right) and John Hart of Hayes and Associates provide investment advice to their client, Carolyn Crane.
Bless Young of Edward Jones Investments
Bless Young of Edward Jones Investments

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