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How to Survive a Financial Windfall

September 29, 2019

It seems counter-intuitive, but receiving a financial windfall can be just as much of a curse as it is a blessing. Just ask the nearly one third of lottery winners who declare bankruptcy, according to the Certified Financial Planner Board of Standards. Other studies suggest lottery winners are more likely to suffer from depression, drug and alcohol abuse, and suicide. 

 

So why is this the case, and what are the recommended strategies for managing a financial windfall?

 

The first mistake a lottery winner can make is not reaching out to a financial advisor before telling a parent, sibling, or friend, etc. As soon as family and friends catch wind of the surplus, they can exert an inordinate amount of pressure to extract money from the winner, in the form of gifts, investments in half-baked business ventures, or cash hand-outs. 

 

Any gifts in the form of cash are subject to the high gift tax rate. Adding in state and federal taxes, which can gobble up around half of the total winnings, a lottery winner is left with much less than the original winning amount.

 

Professional athletes are in a similar boat with they receive a financial windfall in the form of a multi-figure sports contract. 78% of NFL players go broke two years into retirement. If a lottery winner or professional athlete who does not have healthy financial habits suddenly comes into a lot of money, their earnings will run out a lot faster than they plan for.

 

Receiving a sizeable inheritance can likewise encourage people to spend a lot of money very quickly, rather than investing it all to grow their money. Instead of reacting to a financial windfall with a “Spend” mentality, people should focus on saving or investing the amount and learning to live on the income from the invested windfall.   All too often, an adult child may use their inheritance from their parents to buy a boat or go on an expensive vacation, rather than use that surplus to grow their money and otherwise make their money work for them. 

 

A financial advisor can help people survive financial windfalls. Lottery winners and professional athletes can use their financial advisor as a sounding board on their financial planning and wealth management related-decisions. For any family or friends who try and pressure them for money, they can redirect and ask the person to “Talk to my financial advisor.” 

 

Finally, it is important when hiring a financial advisor to make sure they are a fiduciary. A financial professional who acts as a fiduciary serves in their client’s best interest. Working with a fiduciary is an important step to creating wealth. If you are interested in working with a fiduciary to grow your wealth, please contact us at 515-557-1860 or email us at invest@taberasset.com. We are a fiduciary based in Des Moines, IA, serving clients from across the U.S. 

 

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