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
1. 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. A suggestion is to 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?
2. 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 we provide below are basic 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.
3. Doing nothing also means not quitting your job. It may be tempting, but lost wages and the lack of social interaction from your coworkers 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.
4. 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.
5. If you don’t have an emergency fund, now is the time. Set aside reserves of at least three to six months' worth of your expenses, preferably the latter. The future can sometimes throw you an unexpected curve ball. Having reserves set aside will reduce your financial stress.
6. 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.
7. Think about tax and estate planning. No one is sure what may or may not happen to the tax code this year or next. But it’s critical that you 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.
8. 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.
9. 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.
10. 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 eyeing, 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.
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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation
Happy New Year to you! We hope you and your family had a truly joyous Christmas and holiday season.
The world in motion.
As we put 2016 behind us, we head into 2017 recognizing life is continually on the move. In a matter of days, Donald Trump will be inaugurated the 45th President of the United States. On the world stage, the media is intently focused on Trump's cabinet, policy matters, Russia, hacking, foreign policy, race relations and of course the buzz phrase of 2016—fake news.
We're certainly not diminishing the significance of what's taking place in the world today, but we think everyone can collectively agree the news cycle over this last year has simply been exhausting! Amidst all the voices and the magnitude of the noise, we know these matters can create anxiety, uncertainty, and cause you to perhaps look at the future with apprehension rather than anticipation.
So we hope to put some matters into perspective and encourage you in this – stay focused on the vision for your future and don't let any of the tumultuous events of the day derail you from that vision. You may be encouraged or discouraged by the outcome of the election season, but know that investment success has historically depended more on the strength and resilience of the American economy than on which candidate was in office.
The good news is there are many reasons for optimism about the economy.
Remember, we are not market timers. Market corrections, friction, and uncertainty come with the territory of investing, but corrections and market volatility historically have always come and gone.
Overall, we're encouraged by the prospect of an economy going forward that will be driven less by Federal Reserve policy and more on free market principles.
Your future will be determined by what transpires in your own home.
Most importantly, putting aside the market and economy, recognize your success in life has more to do with what takes place in your own house than any external forces. Your dreams for your family, your occupational goals, how you serve your community, and what you aspire to do recreationally are not fake news – they're real aspirations.
Thank you for allowing us to guide you in your vision for your future!
Truly, this is what drives us to work every day. Picture your financial life as a puzzle with pieces you put together as life unfolds. We recognize our role is to use our financial planning process to help you put these financial puzzle pieces together as needs evolve. It gives us great joy to serve you in this way and we wish you a happy, fulfilling and prosperous year ahead!
Gary Blom & Michael Howell
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Have you ever met or approached a professional at a social event and been tempted to ask a personal question that relates specifically to your circumstances?
We know we have.
Whether it’s a physician, attorney, or CPA, when in need of assistance, we benefit from receiving additional insight from the experts. Of course, you typically want to shy away from any direct questions. But the temptation sometimes arises.
While reluctant to pry a bit of free information from someone who has painstakingly developed their specialized skill set, we find most are very open to discussing financial planning when we are out and about. For starters, we truly enjoy what we do and receive a tremendous amount of satisfaction assisting those who seek our advice.
However, there is one topic we’ll shy away from–and it’s one we get questions about quite often: Where do we believe the market is headed?
Long term, stocks are an integral part of most portfolios, and the historical data bear this out. But many folks who ask for our opinion want to know the market’s direction over a much shorter period.
Questions such as: “What’s going to happen after the U.K.’s Brexit vote?” Or, “how will stocks perform before and after the election?”
We understand the inquiry. Financial advisors have their fingers on the pulse of the market, the economy, and there is this expectation that we have some sort of inside information.
Although we did not expect what happened in Europe to have a lasting impact at home, admittedly, we were surprised by the sharp bounce in stocks and subsequent all-time highs in the Dow Jones Industrials and the broader-based S&P 500 Index.
In some respects, the political earthquake in the U.K. shook up our markets for just two days before cooler heads prevailed and shares began an upward ascent.
While we have reiterated in the past that we have no magic crystal ball (and let us remind you, neither does anyone else), we’d like to take a moment to explain why our approach leans heavily on diversification and eschews market timing.
Irving Fisher was called “the greatest economist the United States has ever produced” by none other than Milton Friedman, who won the 1976 Nobel Prize in economics.
Yet, Fisher’s record is stained by his 1929 remark that “stocks have reached what looks like a permanently high plateau.” Making matters worse, his comment came just three days prior to the crash (CNBC: “Spectacularly Wrong Predictions”).
"By itself, a new high isn't a reason to sell."
Every so often, we’re reminded of another blunder from Business Week.
In 1979, the respected periodical ran a cover story entitled, “The Death of Equities.” The article included this line, “The old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared…The death of equities is a near permanent condition.” (Forbes: “6 Doomsday Predictions That Were Dead Wrong About the Market”).
Three years later, stocks went on an 18-year bull run.
While we could continue with the anecdotes, the above examples illustrate that market timing is ultimately an exercise in frustration and is likely to be a detour that takes you further from your financial goals.
AN ALL-TIME HIGH - HOW SHOULD I REACT?
During July, the S&P 500 Index finally eclipsed its prior all-time closing high set back on May 21, 2015 (St. Louis Federal Reserve).
By itself, a new high isn’t a reason to sell.
Since the bull market started in 2009, there have been 45 record highs for the S&P 500 Index in 2013, 53 in 2014, and 10 in 2015 (LPL Research). Since topping the prior high on July 11, the S&P 500 has gone on to close at six more highs during the month (St. Louis Federal Reserve).
Again, by itself, a new high isn’t a reason to go to cash.
What we do counsel is to avoid emotionally based decisions. In our experience, they rarely work.
A LOOK BEHIND THE CURRENT RALLY
It’s somewhat counterintuitive, but a post-Brexit world may actually be helping stocks in the U.S., as nervous cash in Europe seeks safety in the U.S.
But it’s not all gloom. While the U.S. economy is expanding at a subpar pace, it is growing, and the consumer is leading the way (U.S. BEA), which supports corporate earnings.
Speaking of earnings, once again Q2 earnings are topping a low hurdle (Thomson Reuters). More importantly, analysts are cautiously forecasting that the four-quarter earnings recession appears set to end in the current quarter.
Finally, a cautious Fed has been a plus for equities simply because low interest rates create less competition for stocks. If we were in a recession and profits were sliding, low rates would likely do little to support equities, in our view. But again, the economy is expanding, albeit modestly.
WHAT'S AN INVESTOR TO DO?
We recognize that we are in an uncertain period. As the economic recovery enters its eighth year (National Bureau of Economic Research), the expansion is no longer young.
It’s been a substandard economic recovery, global uncertainty is high, and we are in an unusual election cycle.
One of our goals has always been to assist you as you reach for your financial goals. That is why we strongly encourage a diversified portfolio that encompasses assets in the U.S. and abroad.
As we’ve mentioned in previous writings, we will eventually enter a recession, and recessions have historically brought about a downturn in stocks. We don’t know when it will happen, but it will. It’s an inevitable byproduct of a free market economy.
While declines in the major averages that exceed 20% can be unnerving, they have always run their course historically, setting the stage for another upward cycle that takes shares to new highs.
As always if you have any questions, we encourage you to contact us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
This research material has been prepared by HorsesMouth
In the markets, recent volatility has caused concern and apprehension for many. As we evaluate the present market environment we're in, we seek to be objective and let the facts and history guide us. If history has been any indication, we can count on economic cycles continuing month after month, and we need to remember that market downturns are part of the natural cycle of investing.
This week we invite you to read the latest from John Cannaly, LPL Financial's Chief Economic Strategist, as we find his thoughts well timed for this current market environment.
As always, please do not hesitate to give us a call if you have any questions or concerns. We are honored to serve you and your families and we're thankful for the trust you exhibit in us as we partner with you and travel this journey together.
Gary & Michael