Perhaps you’ll soon be coming into a sum of money -or maybe it’s already sitting in your bank account. Maybe it’s from an inheritance, a business sale, or an insurance payout.
Most people think it’s exciting, and it certainly can be. But it can be fraught with challenges and stresses about how to handle it as well. The challenges of stewardship have likely gotten much easier and much more difficult all at once.
One of the best parts of this change is that you will likely have choices that you didn’t have before. Should you pay off debts? Increase your charitable gifts or gifts to kids? Or is it time to pull off some of your bucket item goals or things you’ve been deferring forever?
It’s funny how choices can sometimes be paralyzing, isn’t it? When we have 2 or 3 options, choosing one usually isn’t that hard. But when the sky’s the limit, it can be difficult or impossible to separate good from great.
There’s certainly not a right answer for everyone when it comes to what to do with a windfall. However, we’ve found several tried and true principles that can help you avoid disaster as well as set yourself up for long-term success.
If you’re uncertain as to the right strategies to implement, you’ve come to the right place.
This guide is designed specifically for folks like you who have come into a larger sum of money, to help you ask the right questions and determine the right strategies to implement.
If you have questions such as…
Depending on your situation, you may not have options when it comes to the timing or form of the funds you receive. It may come all at once, or over several years. It may be in cash, or in the form of investments, real estate, or other non-liquid assets.
If you have received funds from an inheritance, the good news is that it will generally not be immediately taxable to you. In fact, non-retirement investments and real assets will all receive a “step-up” in cost basis, meaning there will be little to no gains if you sell them shortly after receiving them. In fact, if you do receive non-cash assets that you don’t intend on keeping for extended period of time, it’s often best to go ahead and liquidate them earlier before they appreciate so that you can reinvest them however you like without worrying about a huge tax liability.
Life insurance proceeds are tax-free, so don’t worry about a tax bill from those.
Most estates are not subject to inheritance taxes, and those that are generally will pay the taxes before distributing assets to heirs, so you should not have to deal with those.
Inherited IRAs are often where the tax problems lie. The current rules on them are that they need to be distributed within 10 years of receipt, and you can choose to take distributions in any or all of those years so long as the account is liquidated by the end of the 10th year.
Inherited Spousal IRAs have their own set of rules, with more options and flexibility than non-spousal Inherited IRAs.
Generally speaking, it’s often advantageous to squeeze the distributions into years when your income (and taxes) will be lower in order to take advantage of lower tax brackets. This might mean waiting until after you retire, in a year when deductions are higher, or any other year when income is lower for some reason.
When you receive an large influx of money, it’s a great time to reassess your investment strategy. How much risk should you be taking? What’s the best way to get the funds invested in a volatile market? How do you set up withdrawals from your investments? While there are no one-size-fits-all investment strategies, there are a few great rules of thumb to keep in mind.
Dollar Cost Averaging
Dollar Cost Averaging (DCA) is the strategy of investing the same dollar amount periodically (typically monthly) over a certain period of time. When markets are down and share prices are lower, you will purchase more shares of the investments, and when markets are up you’ll purchase fewer shares. This evens out, or averages, the cost of the investments over time and you don’t have to worry as much regarding whether the stock market is getting ready to take a big dip (in fact, the dips can help!).
Invest according to your time horizon
Rather than just investing on whether you feel like an aggressive or conservative investor, a more logical approach is to invest based on your time horizon. When are you planning on needing to use the funds? Any funds needed within the next few years should be in conservative investments like bonds and cash. Conversely, investments you’re not planning on using for 10 years or more should be invested in more aggressive investments like a diversified stock portfolio in order to outpace inflation and provide long-term income.
Keep in mind that when you receive a large amount of cash, this is an opportune time to utilize some of it for your personal goals. This might include:
Depending on the goal and how far away it is, you may want to find a productive holding tank for your cash reserves. Do your best to get rewarded for your savings.
When the dollar amounts get larger, making wise investment decisions are all the more important. Making a mistake at this stage can have traumatic effects that may not be recoverable. If you’ve been a DIYer up to this point, this may be the time to get professional guidance on investing your assets.
Sometimes when a family member comes into money, others in the family can take advantage of the situation. You may even know a family that was torn apart over money issues, and don’t want the same thing to happen to yours. We’ve seen too many families be ripped apart over money, but this doesn’t have to be the case.
If you’re wanting to bless others, how do you do so without jeopardizing the relationships? How can you best give in a way that helps and not hurts? Will giving create expectations going forward?
This is perhaps the most delicate issue when it comes to sudden wealth. It’s the reason that most lottery winners try to stay anonymous, because it’s easier than dealing with the unavoidable effects on relationships.
When you do choose to make gifts, good communication is often the key to success. Communicating up front with your loved ones and charities you support can help prevent improper expectations.
Also, giving in small doses can often give you an insight as to how they will steward the funds, and may give you more (or less) confidence about their ability to handle larger amounts.
Most importantly, think through how having more money might affect you personally.
Often times we can unintentionally become more fearful when we have more, as we have more that we’re able to lose.
Suddenly coming into sizeable amounts of money has the potential to alter the trajectory of your life. The opportunities have multiplied, but so have the effects of potential mistakes. The reality is that you won’t get a second chance for a do-over.
There’s never been a more critical time for a good planning. Planning well can help you see the dangers ahead and avoid them. Planning well can help you take advantage of the tax code. Planning well can help you grow your investments better, reduce volatility, and lower risk.
Some of these strategies are time-sensitive, and the sooner you put them into practice the better.
All of these issues are relationally sensitive, and it’s critical to have someone you can trust to help walk through these technical, emotional, relational, and spiritual challenges.
Our team of professionals have the training and experience to help you navigate these issues and help you get the peace of mind you need regarding your wealth. We can analyze your unique situation and give you personalized counsel to help you reach your long-term goals.
We want this guide to serve as a valuable piece of content that you can refer back to over time if you encounter a situation of sudden wealth and need to know what to do! Don’t hesitate to reach out with any questions as you go through it!
If you’ve found this guide on sudden wealth to be valuable, please pass it along to anyone who may find it helpful. Together, we can empower more individuals with the knowledge they need to make the most of their newfound wealth!