You may have been the beneficiary of a life insurance policy or been given a large inheritance. Are you ready? You may be thinking of making someone the beneficiary. Will they be ready to handle sudden wealth?

Sudden Wealth- What’s the financial plan?

In the parable of the talents, the owner gives servants money, expecting that they will grow what they have been given. Spend was not one of the options. Yet it is what many people do. In fact, there is something known as a spendthrift provision that estate planning attorneys can put into documents limiting the access to beneficiaries.

Financial Planning: Save, spend, invest or ”Give Me the Money”?

Have you thought of how much money you do NOT have? Chris Rock once joked that Shaquille O’Neal was not wealthy- simply rich. He did say that the owner was wealthy as that person paid Shaq’s check. Could you buy a team or a downtown Chicago high rise building?

It is typical to believe that a large sum of money has unlimited spending. Let’s say that you came into $5, 000,000. If you stuck in a mattress for about 20 years and pulled it out, it would be worth closer to $2,500,000. What happened? It is called inflation.

Let’s say that you put it in a savings account. Today you are probably making less than 1%. Based on the last 20 years, if you aren’t making about 5% before taxes, your money is losing its purchasing power due to inflation. I haven’t even said anything about how much you are spending.

Historically, before 2008, some researchers discovered that you needed to spend no more than 4% of your nest egg if you didn’t want to run out of money. If you are like most people, you don’t think in terms of averages. You think in terms of $200,000 or whatever amount you feel you need. If someone had the knowledge, they would have to spend say $100,000 if their inheritance dwindled down to $500,000 because of market conditions. That would take a lot of faith in the markets and much spending discipline.

Who said anything about taxes and my financial plan?

It is not how much money you make but how much money you keep. There are countless stories of people that didn’t know about federal and state estate taxes or capital gains taxes. You may have been fortunate in that the money you received was tax free and not estate taxed before you got it. Depending on how the policy had been structured or not, it might have been reduced due to estate taxes (see your attorney if you are the owner of the policy to see if that might happen to you.)

Once you invest the money or start spending it, you will start to pay taxes. Recently I heard of a story that a 20 year old came into $300,000 and wanted an apartment for $3000 per month. How many months could they stay in the apartment? Did you include an estimation for rent increases in your calculation?

Sudden Wealth Mo’ money, mo’ family

A common erosion of wealth is family. Often family members either need loans, gifts, etc. Typically they could not get the same loan at the bank but believe you owe them now that you have the money. The airlines tell us to put on our oxygen mask before assisting others. Do we know how long our money will last based upon different spending rates, different inflation (purchasing power) rates and different investment rates?

It is common to lean on the investment manager to make more money rather than on the financial plan. The markets are fickle even with “the best” investment manager and the “the best” investment plan. If this is your first rodeo, you might fall for the line- “I will protect you from down markets and allow you to capture the ups”. Yeah right. Even Warren Buffet doesn’t have that crystal ball. Surely The President would do something to make getting re-elected if he knew. Only believing in diversification and time and allowing them to work seem to reward investors over the long time. By the way, Warren Buffet, considered by many to be the best investor buys things when the market is down when many others shy away. You probably have heard buy low and sell high. Few of us seem to practice what has been preached.

Shop for a financial planner or wealth manager

I believe in scenario financial planning from my business background. You certainly know what you would do in your ideal scenario. What happens if you get the least ideal? What’s the action plan? The three variables that you get to manage are time, savings and debt.

My advice is to shop around for tax, estate and financial counsel. I believe you should find a good financial planner or wealth manager that can coordinate a team of experts. This team should work together to look at your options from several angles- investment, tax, legal and psychological. What might be right for one person is not right for the other.

As you have benefitted from someone’s love or generosity, how might you do the same for others based on growing what you have been given? Because when it’s gone it’s gone, do get a second opinion.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 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. All indices are unmanaged and may not be invested into directly.

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