windfalls can come in a variety of forms, such as an inheritance, life
insurance proceeds, large gifts, structured settlements, retirement
lump-sums or even lottery winnings. Upon receipt, most are not prepared
to handle such a large sum and often make many mistakes. The large
amount poses an obvious temptation to spend and many are not prepared.
How many times have we heard the winner of a large lottery say,
years after the fact, they wish they had never won the money in the
first place? The expectations from family, friends, neighbors, etc. can
be a heavy burden and a strain on your relationships. Whether you
received your windfall as a result of good fortune or proper planning,
many may expect more than you are willing to give. And as a result of
poor planning many have squandered their fortune away. It can be a
difficult challenge, but with proper planning these pitfalls and others
can be avoided.
So what are some of the considerations? First, are you capable of
handling the funds yourself or do you need to contact a financial
adviser or CPA? Expert advice can help to manage the tax implications
(now and in the future), develop a new budget, determine the new cost
basis if assets are received, develop an investment plan, or revisit
your previous retirement plan. You may also want to consider retiring
your existing debt obligations. However, it may not always be to your
benefit to eliminate debt immediately. This is also a wonderful time to
consider the educational needs of your children or grandchildren. Are
there college needs being met and do you want to help?
If the windfall comes in the form of lottery winnings, you will
have to determine if you want the winnings paid out in installments over
time or in one lump sum. It is vital to consider the opportunity cost,
which is the potential of gaining a greater overall return by taking
and investing the single lump sum. This can also be true of lump-sum
retirement distributions vs. retirement annuity payments.
Receiving such a windfall may also change your insurance needs. A
focus on auto, home, and personal liability insurance is essential. You
may not need to carry as much life insurance on yourself, or other
family members. Also, you may be able to self-insure your home and
autos, but still continue liability coverage against the claims of
It is obvious that a lot of thought and planning will need to take
place to properly manage such a windfall. As wonderful as receiving or
earning this windfall can be, it is imperative to consider the factors
mentioned as well as others. Avoiding the temptation to immediately
start spending but rather taking the time to plan wisely, can help you
meet your goals and enrich your life.
Aaron Archambo is a financial advisor and the vice president of Archambo Financial Advisors, Inc.
Securities Offered Through Dominion Investor Services, Inc. Member FINRA & SIPC.