Sudden wealth can come with serious emotional and financial challenges
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Money, despite all the opportunities it offers, can be a major source of stress and anxiety if you’re not used to having it.
Getting rich suddenly, whether through inheritance, a career windfall, or luck in the lottery, can create serious emotional and financial challenges for people who haven’t had much money in their lives.
“Are you going to continue working? Buy a new house; a private school for children? said Barry Glassman, certified financial planner and founder and president of Glassman Wealth Services, Vienna, Virginia. “Sudden wealth offers more choices, but it can cause a lot of problems and anxiety due to the large number of decisions to be made.”
Consider professional athletes. A study conducted by the National Bureau of Economic Research in 2015 found that 15.7% of NFL players had filed for bankruptcy within 12 years of retirement, although many of them had earned millions of dollars in retirement. course of their career. According to Sports Illustrated, 78% of retired soccer players were in serious financial trouble just two years after leaving the game. The statistics were only marginally better for professional basketball players.
The young athletes who become overnight millionaires aren’t the only ones struggling with good fortune. People who receive large sums of money very often find it difficult to manage it well. So, what if you are the beneficiary of a windfall?
“Do nothing for a good year,” said Sheryl Garrett, CFP and founder of the Garrett Planning Network in Eureka Springs, Arkansas. “Don’t call a financial adviser and give people details about it, except talk to a good tax lawyer.”
Glassman has the same advice. “Don’t buy anything, make any investments or pay off your debts,” he said. “You can make those decisions in a few months.
“The only thing to do with urgency is to meet with tax professionals to discuss the taxation of your windfall and tax compliance in your new situation.”
There will, of course, be many decisions to be made, many of which will be very happy. However, a large sum of money will almost certainly present emotional challenges for people who are not used to having significant wealth.
The stories of the misfortunes of lottery winners are true. Lots of money can change the expectations that family and friends have of you and can seriously challenge close relationships.
“When it comes to money, someone in a circle of family and friends is going to be in trouble,” Garrett said. “It could be the recipient of the windfall, or it could be a brother-in-law who feels he deserves some of it.
“People are getting greedy,” she added.
Garrett also warns people to beware of the illusion of large numbers. One situation she sees frequently involves clients who are offered a buyout of their defined benefit pension plans. People who are offered a $400,000 payment versus $2,500 per month for the rest of their lives usually take the lump sum even though the monthly payment makes more financial sense.
“We tend to think big money will last a long time,” Garrett said. “There’s so much motivation to take the big lump sum and so many things that want to separate us from that money.”
Even people who experience much larger windfalls face challenges managing them effectively. Glassman has clients who have sold businesses for millions, and they too are buying things and making investments that drain their long-term wealth.
“I had a client who made $15 million after selling his business,” he recalls. “He spent $4 million buying real estate and ended up with $11 million and $100,000 in new annual expenses.”
Not that you shouldn’t buy a house, car, or boat for yourself or someone else if that’s what you really want. The problem with sudden good fortune is not spending money too quickly, lavishing gifts on family and friends, or making bad investments. It’s not about making sure your newfound wealth is sustainable. In other words, you need a financial plan.
After “doing nothing” and consulting an accountant, your next step should be to find a good financial advisor to help you manage your wealth and ensure its sustainability.
“The challenge is prioritizing what’s important to you,” Glassman said. “You might want to pay off student loans or buy a house for mom or a motorcycle for yourself.
“That usually can’t be all,” he added. “A good financial advisor will help you think through those priorities and put the money to work to help you achieve your goals.”