We often caution folks against treating their retirement accounts like a windfall. But how should you manage an ACTUAL windfall, such as a large inheritance, a bonus or buyout from your employer, profit from selling a business, or winning the lottery?
Well, since you're more likely to get struck by lightning than you are to win Powerball, I'll just say: you should probably take the lump sum and work out a responsible spending plan with your advisor.
Other windfall scenarios, however, are very realistic, especially for boomers who are caring for older relatives or navigating the ends of their careers as they near retirement age. At Keen Wealth, we advise folks who are preparing for a windfall to pay particular attention to these three challenges.
1. The emotional impact
"Money changes people" isn't just an expression. So-called "sudden wealth syndrome," while not a clinical diagnosis, is a phenomenon that many therapists have noticed in their patients who receive a windfall. You might feel overwhelmed by the numerous decisions you're suddenly facing about the best uses for the money. You might be worried about spending too much too fast and losing everything. You might feel anxious around friends and family who know about the money and might pressure you into helping them with their own financial problems. And, if the windfall is the result of a negative life event, such as the death of a loved one or a forced retirement, the conflicted emotions you're experiencing might make it hard for you to enjoy this windfall or put it to good use for yourself and your family.
When I'm advising someone who's received a windfall, step one is always the same: Take a breath. Don't make any major moves, not even something that feels responsible, like paying down a mortgage or bailing out a struggling relative. Give yourself some time to feel what you're feeling about this money so that you can move through the next steps of this process with a cool head.
2. The tax impact
When we hear a phrase like "windfall," our minds tend to go to enormous sums of life-changing money, like that Powerball ticket or selling a company. Obviously, these scenarios create enormous tax complexities that have to be sorted out and it can be beneficial to have a professional tax planner assist in navigating these situations.
But even if your windfall doesn't mean that you never have to work again, inheriting cash, artwork, a classic vehicle, securities, or a piece of property can change your tax picture. If you want to sell the family house or some inherited securities, you'll probably have to pay taxes on those earnings. Keep the house, and you'll have to start paying property taxes. If you inherit a retirement account, recent rule changes could affect the distributions you have to take, which could affect your total level of taxable income.
I know there are still plenty of folks who like to break out their pad and pencil at tax time or plug all their info into tax planning software. Please don't treat a windfall like just another line item. Even if you've accurately filed your own taxes for decades, this is something new. Let a professional assess potential changes, difficulties, and advantages you might not be aware of.
3. The financial planning impact
To effectively manage a windfall, you need a support system of trusted friends, family, and professionals who can help you maintain perspective and arrive at the best decisions.
Talk to your spouse or a confidant about how this windfall has affected your financial goals. Are you thinking about a major life change, such as early retirement? Or maybe a more modest standard of living upgrade, like buying a new car or renovating your home? Could you use this windfall to pay down debt or help a charitable organization? Did a loved one leave you this money so that you could get more out of life by crossing a trip off your bucket list? Or do you hope to incorporate your windfall into your estate plan and build generational wealth that will support your family for years to come?
Once you’ve taken that first deep breath and cleared your head, let’s meet to discuss how you’re feeling about your windfall, what you want to accomplish, and how Keen Wealth’s comprehensive planning process can help.
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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