Successfully managing a financial windfall
We’ve all heard the stories. If not first hand, at least in various news reports and anecdotes.
Some “lucky” person picks the winning numbers, prances before the cameras in what can only be described as a media lovefest, and lives happily ever after, free of financial worries.
OK, the first two points are correct, but the happily ever after doesn’t always materialize. In fact, in most cases, sudden money leaves the winner worse off than prior to their windfall.
Many winners, who aren’t used to managing a large sum of money, mismanage the funds and wreck their lives in the process. As it turns out, it’s a variation on the theme of the Prodigal Son. Only the names and the details change.
Of course, odds of winning life-changing cash in a lottery are incredibly low.
We are more likely to be the recipient of an inheritance or an insurance settlement. And it’s the unexpected pile of cash that may create an initial sense of euphoria and a false sense of security.
“The vast majority of people blow through [a financial windfall or inheritance] quickly,” said Jay Zagorsky, an economist and research scientist at The Ohio State University and author of a study on receiving an inheritance.
Whether large or small, it can seem like “play money.” And that is where the danger may lurk.
So, that brings us to the next question. What should you do if you happen to be the beneficiary of a financial windfall?
10 steps to creating a firewall around your newfound stash of cash
- First, do nothing. That’s right, do nothing. The temptation may be to buy a new car, take a luxury cruise, or upgrade your living arrangements. That can begin an unwise cascade of purchases that will likely leave you feeling regret.I suggest you wait at least six months before embarking on any life-changing decisions. The time spent waiting and planning allows the “shock” of your newfound wealth to wear off.Besides, you need to take time to learn exactly what you’ve inherited. Is it all cash? Is it stocks and bonds? Have you just become the owner of a business or real estate?
- Talk to a trusted advisor. Find someone who has your interests at heart, not his or hers.If you are expecting to receive a windfall or have already received an unexpected inflow of assets, let’s talk and see how we can incorporate it into your overall financial plan.The suggestions I’ll provide below are what I call the basics, the fundamentals. They may not apply directly to you, but they are common sense tools designed to help you make smart decisions and prevent an expected or unexpected windfall from being squandered.
- Doing nothing also means not quitting quit your job. It may be tempting, but lost wages and the lack of social interaction from your work buddies may lead to remorse, even if you don’t especially enjoy your job. Besides, without work, you run the risk of blowing through your money much quicker than you had anticipated.
- Reduce debt. We’ve always provided a holistic approach to financial planning. Once things have settled down and you have a better understanding of your inheritance, it may be time to pay down or pay off high-interest debt. Once eliminated, you no longer have that onerous outflow of interest payments on your loans.
- If you don’t have an emergency fund, now is the time. Set aside reserves of at least three to six months, preferably the latter. The future can sometimes throw you an unexpected curve ball. Having reserves set aside will reduce your financial stress.
- Additionally, you may decide to allocate additional funds toward savings and retirement. Again, every one of our clients is unique, with various goals, personal circumstances, and financial resources. What our team recommends for one person may vary significantly from what’s best for another.
- Think about tax and estate planning. No one is sure what may or may not happen to the tax code this year or next. It’s something I touch on below. But it’s critical that we get a handle on the tax ramifications of your inheritance in order to maximize the financial benefit.
For example, did you know that you may be required to take distributions if you inherit an IRA? What if you are already taking required mandatory distributions? You see, things can get tricky rapidly, but sound advice can quickly ease any concerns.Additionally, life changes are a great time to update your estate plan, especially if the inheritance increases the complexity of your financial situation. - Be cautious. Less-than-reputable salespeople and relatives may suddenly warm up to you, with the unspoken goal of separating you from your cash. That’s why a trusted advisor is critical. If you have a well-thought-out financial plan, it’s much easier to pass on potentially exploitative offers.
- Consider charitable giving. Do you have a favorite charity? Would you like to help a niece or nephew finance their education? Now is the opportunity to explore the possibility of helping others.
- Have some fun. There’s nothing wrong with treating yourself. As we provide counsel, we would like to leave some room for self-indulgence. Do you like to travel? Have you thought about an addition to you home, finishing your basement, remodeling your kitchen, or upgrading appliances? Maybe it’s those top-of-the-line golf clubs you’ve been eying or a new car.Or, maybe you’d like to spend money catching up on the everyday things of life you’ve been putting off. Everyone has a hot button. I know many of your goals. It would give me an immense amount of pleasure helping you achieve your dreams.
With a financial plan in place that manages your windfall, you’ll feel much more secure enjoying the benefits of your wealth without the nagging worries that you might run through your nest egg with not much to show for it.
Holding pattern and the Trump tax cut plan
Stocks at home and overseas have experienced a run-up in prices over the last six months. After the S&P 500 Index claimed a new high on March 1 (St. Louis Federal Reserve), it has more or less held within a narrow range.
That hasn’t been the case for the tech-heavy NASDAQ Composite, which topped 6,000 for the first time last month (WSJ).
Admittedly, it’s an impressive comeback for an index that was clobbered in the post-dot-com era. But it’s a testament to the resilience of the U.S. economy and U.S. markets.
Table 1: Key Index Returns
| MTD % | YTD % | 3-year* % | |
| Dow Jones Industrial Average | +1.3 | +6.0 | +8.4 |
| NASDAQ Composite | +2.3 | +12.3 | +14.1 |
| S&P 500 Index | +0.9 | +6.5 | +8.4 |
| Russell 2000 Index | +1.0 | +3.2 | +7.8 |
| MSCI World ex-USA** | +1.9 | +8.0 | -2.1 |
| MSCI Emerging Markets** | +2.0 | +13.4 | -0.6 |
| Bloomberg Barclays US Aggregate Bond TR | +0.8 | +1.6 | +2.7 |
Source: Wall Street Journal, MSCI.com, CNBC, Morningstar
MTD returns: March 31, 2017-April 28, 2017
YTD returns: December 30, 2016-April 28, 2017
*Annualized
**in US dollars
For the broader market, we’ve been in a wait-and-see mode.
For starters, there is the political angle, which has been a distraction. Republicans have yet to agree on a replacement for Obamacare. For now, it remains the law of the land.
But investors are more interested in tax reform and a significant cut in the corporate tax rate.
While a cut in the rate corporations pay could conceivably boost the incentive for firms to invest and expand, from the standpoint of a simple math equation, a lower tax rate translates into higher after-tax corporate profits.
And it’s rising profits that fuel stocks longer term.
Late last month, Team Trump unveiled its blueprint for tax simplification and tax cuts. And I’ve already received questions about its perceived impact.
Using data from the official White House website, Trump would like to:
- Take the seven tax brackets we have today and reduce them to three: 10%, 25%, and 35%. But no mention of income thresholds.
- Double the standard deduction for married people to $24,000.
- Provide aid for child and dependent care expenses.
- Repeal the AMT–the alternative minimum tax.
- Repeal the Medicare surtax related to Obamacare.
- Repeal the inheritance tax, the so-called “death tax.”
- Retain deductions for mortgage interest, charitable giving, and retirement; all others would be repealed, including state and local taxes and property taxes.
- Reduce the corporate tax rate from 35% to 15%.
Let me just say this: Trump’s proposal is simply a framework that he hopes will set the tone for the upcoming debate. Much more work must be done before details emerge.
If or when tax reform becomes a reality, we can make any necessary adjustments to your financial plan, capitalizing on positive changes or minimizing any provisions that may not be advantageous.
Until then, we are just speculating.
That said, I understand you may have concerns. If so, never feel as if you can’t pick up the phone and call me. I would love to hear from you and address any questions you may have.
As I’ve said repeatedly in these monthly newsletters and will say again, I am honored and humbled that you have entrusted me with the duty of serving as your financial advisor. It is a privilege that I don’t take lightly.
All investing involves risk and no strategy can guarantee success. All data are taken from sources believed to be reliable, but Royal Alliance makes no guarantee of their accuracy. All suggestions are general in nature and may or may not reflect your individual situation.
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DANIEL F. YASHAREL, MSFS, CFP, RICP
Senior Partner NWF Advisory Group
CA Insurance Lic. # 0678291
Master of Science in Financial Services
Certified Financial Planner™
Retirement Income Certified Professional
Chartered Advisor in Philanthropy
Accredited Estate Planner
Chartered Financial Consultant
Chartered Life Underwriter
Real integrity is doing the right thing,
knowing that nobody’s going to know whether you did it or not.
11835 W. Olympic Boulevard, Suite 1155E, Los Angeles, CA 90064
(310) 475-5854 Fax (310) 773-9888
e-mail: yasharel@nwfadvisory.com
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Registered Representative offering securities through of Royal Alliance Associates, Inc., a registered broker-dealer and Member FINRA/SIPC. Investment Advisory and Financial Planning Services offered through NWF Advisory Services, Inc., a Registered Investment Advisor which is not affiliated with Royal Alliance.