Many of us will receive an unexpected windfall at some point in our lives, with inheritances and retirement payouts being the most common.
Susan Bradley, CFP, author of “Sudden Money: Managing a Financial Windfall,” defines “sudden money” as the unexpected receipt of an amount of money that is much larger than you are accustomed to managing. According to her research, there are eight sudden money events: Taking a lump sum retirement payout, inheritance (either spousal or intergenerational), winning the lottery, insurance settlements, divorce settlements, stock options and becoming overnight sensations in entertainment or athletics.
“Many of the issues, decisions and challenges that sudden money recipients encounter are the same ones that they would have faced on their more gradual journeys to money maturity,” Bradley writes. “But then a situation is thrust upon them, and they feel like they have less time to figure out what is going on in their financial lives; more people want to advise them, go into business with them or borrow money. And new friends come out of the woodwork.”
Even if you are an experienced investor, sudden money puts you in new territory, and you will need objective professional guidance. A windfall can result in a quick transition from the accumulation phase of your financial life to the wealth management phase. Your goals could change along with your tax bracket, and estate planning may become more important.
The sudden money process has three phases, and each phase has to be completed before you move on to the next one, Bradley writes. “Phase one is a time of preparation and planning for the investment and lifestyle decisions you will be making in the second phase. Phase two is a time of action: putting your money to work by investing. Phase three is defined by the monitoring of your annual progress toward the goals you have set, and sharing your wealth with your family and community.
“The turning point of phase three is when you realize that you have enough money and income for your own needs,” Bradley writes, “and when you begin to think about passing your wealth on to your loved ones and sharing some with charitable causes.” Estate planning and charitable giving typically come later in the process, but they can be the most rewarding aspects of having wealth.