"I stand to inherit a lot from my father, including high cholesterol and diabetes. Oh, and maybe a few Beatles records. Actually, the first two don't sound bad compared to the last," - Jarod Kintz, author and humorist (1982 - ) -- "This Book is Not FOR SALE."
By Julia Anderson
Your grandmother leaves you an unexpected chunk of money in her will. A great-aunt dies with you named as her only heir.
our spouse dies leaving you a substantial life insurance payout. An employer offers you a lump sum pension buy-out. You settle a lawsuit.
You win the lottery!
Coming into a large amount of money, especially if it is unexpected, may at first sound like a wonderful surprise, a good thing. But financial advisers say people often lose their heads when they see dollar signs. They put the new money in a special category and go on a spending spree. Later they may have regrets about how the money was used.
In one case, a middle-aged woman received $3 million in life-insurance money when her husband was killed in an on-the-job accident. She gave money to friends and family, took expensive trips, bought and sold houses and expensive cars. Within five years the money was gone.
Coming into money can happen at any age but women over age 50 will likely be among a large category of recipients. That’s because they stand to inherit 70 percent of the assets that will be passed down over the next two generations. Those assets likely will come from their elderly 90-something mothers when they die or when a long-time spouse passes on. Or both.
Whatever way it may happen, coming into money has psychological implications, says Susan Bradley, author of “Sudden Money: Managing a Financial Windfall.” “People think windfalls are about money. But it’s really all about change and transition…and people need time to adjust,” she says.
Plan ahead, if you can
If you have the slightest hint that you might inherit money, make your plans in advance to avoid bad decisions. If it’s a surprise, establish a money moratorium. Some advise that you should not tell anyone of your windfall…not your kids, not friends.
Do nothing with your money for at least a few months, if not an entire year, advise the experts at Bankrate.com. Put it in safe place such as short-term bank CDs. Get it out of your checking account so you don’t see it every day.
Seek the help of a therapist to sort through the emotional impact of your sudden wealth. Money changes who you are, affects relationships and may create resentments. “Everything a person has spent decades building changes in one fell swoop,” says Dennis Pearne, psychologist and co-author of “The Challenges of Wealth.” “Half the people who attain sudden riches spiral into self-destructive behaviors.”
The advisers at Fidelity.com recently posted an item, "What to do with a big, fat inheritance," They suggest that if you've got a chunk of money that the best strategy is to look long-term with a plan to reinvest for earnings and income in 70 percent stocks and 30 percent bonds. "Focus on creating a portfolio that's right for you,' says Walter Updegrave in the Fidelity post, "but stick to low-cost choices like index funds or ETEs. Half a percentage point a year in fees can boost the eventual size of your nest egg by 25 percent or more."
Set up a team of advisers
If your windfall is substantial, the experts recommend that you weather the storm by setting up a team of advisers whom you trust: a fee-based financial planner, an estate attorney and an accountant. Don’t ignore taxes.
Some windfalls such as an insurance payout are tax-free. However, a large inherited estate could be subject to federal and state taxes. Or if you cash out an inherited (and tax-deferred) individual retirement account you may owe taxes on the entire amount. How to handle these issues requires tax advice.
Meanwhile, don’t quit your day job. Windfall recipients often under-estimate how much money they’ll need to replace their income, says William Hammer in the Kiplinger Personal Finance newsletter. “If you earn $50,000 a year, you’ll need to invest anywhere from $1 million to $1.5 million to generate enough to replace that income, he said.
Those who are retiring already know this from calculating how much they can withdraw from their 401(k) nest eggs.
Geoff Williams, writing at usnews.com says getting rich can be easy compared to staying rich. “Do nothing for as long as possible,” he says. “Don’t spend unusually large amounts of money. The last thing you want to do is blunder into an expensive purchase you can’t return and will soon regret.”
Issues worth thinking about include your current debt, your plans for retirement and taxes, he said.
The experts all seem to be throwing a wet blanket on having any fun from your new found money. But at least one suggested a “small splurge” on say, a trip you’ve always wanted to take. “A small indulgence could reduce the chance that you’ll blow your entire windfall,” said Mitch Brill, a CFP with MassMutual Financial Group.
Let’s face it, a windfall will likely only come around once in a lifetime, so give yourself time to figure out how to make it last a lifetime.
Definition: Windfall – noun. An unexpected, unearned or sudden gain or advantage usually to do with money. The English word windfall originates from the Middles Ages when royalty or lords owned most land and estates and serfs were forbidden to pick fruit or fell a tree. However, if a storm or strong wind blew down a tree, it was referred to as a “windfall” and free for the taking.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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