A windfall is a significant amount of money that you receive unexpectedly. Windfalls range from small additions to wealth to large fortunes. Because they can mean huge changes in a recipient's life, psychological and emotional factors[note 1] are often the most important determinants of outcome.
The National Endowment for Financial Education advises windfall recipients to do the following:
Stay calm, and do not make any hasty decisions. Set aside one year's living expenses and place the rest of the windfall into low risk investments (FDIC insured accounts, money market funds, treasury bills) for one year. As it may take as long as five years for you to adjust to a new life, this pause provides space for emotions to cool, helps avoid impulsive behavior, and, if warranted, allows you time to put together a team of professional advisers. Then, create a detailed plan to meet your highest priority financial goals, and track your progress over the years.
"Most financial practitioners agree that well over 50 percent [of windfalls] are lost in a relatively short period of time. NBC News reported that more than 70 percent of lottery winners exhaust their fortunes within three years." - "Chapter 15. How to Manage a Windfall Successfully". The Bogleheads' Guide To Investing. Wiley. p. 180. ISBN 978-0-471-73033-0.
Common sources of windfalls
Windfalls come in many forms. Here are some common types:
- Legal settlements: Settlements include personal injury settlements, settlements involving workers compensation and settlements of employment discrimination. Settlements may be a lump sum, or a structured settlement of annuity payments.
- Inheritances: These often include retirement accounts and assets held in trust.
- Gifts: These can range from annual gift exclusions up to the lifetime estate tax credit limit.
- Lottery winnings: Taken as a series of payments; or as the sales value of payments exchanged for a lump sum.
- Insurance settlements: These can be death benefits received as either a lump sum or annuity; as pre-death cash surrender values; or as life settlements, the sale of a life insurance policy by the owner to a third party in exchange for a lump sum.
- Retirement lump sums: Usually taken in lieu of a lifetime series of annuity payments
- Sudden increases in income: These can be bonus payments; stock options; or cashing shares in an IPO.
Other common sources of large lump sums include:
- A real estate sale
- The sale of a business
- Widowhood and divorce
Selling businesses or real estate converts an illiquid asset into large sums of cash. Death and divorce not only cause dislocation and trauma, but often suddenly thrust someone with little or no interest or no experience in investing, into having to manage family wealth.
Size of a windfall
Windfall sizes vary dramatically. A small windfall might bring you a step closer to your financial goals, a bigger one may make you financially independent, and an enormous windfall might be more money than you ever imagined spending. Windfall size is somewhat relative to your income and assets; what would be a life-changing amount of money for one person might only accelerate someone else's mortgage payoff by a few years. Some thresholds are more absolute, such as the Federal estate tax exemption ($13.61M for singles and $27.22M for married couples as of 2024); financial planners generally agree that you need additional planning with assets above this level.
This wiki article aims to offer guidance for windfalls that are relatively large compared to your income and assets, enough to entail significant lifestyle changes and the need for additional planning. It applies to a wide variety of windfall types, sources, and absolute sizes. Use the guidance that is most relevant to your individual situation.
Common errors of commission made by windfall recipients include:
- quitting your job prematurely
- buying extravagantly priced automobiles or properties, or other expensive consumption spending
- feeling overconfident about your business or investing acumen, jumping into new high risk investments (such as hedge funds) or as an "angel" investor in start-up companies
- falling prey to overcomplicated estate and investment management schemes. Watch out for people who might try to exploit you or take advantage of your new wealth. You can be a target for all kinds of financial schemes.
- by being too generous to family, friends, and charities
Common errors of omission include failing to:
- pay the legally required taxes
- choose risk-appropriate investments and earn a reasonable return on invested capital
- use appropriate accounts such as retirement plans
- engage with the right professionals
- set up the appropriate plans, including estate plans
These initial steps will help position you to manage a life-changing amount of money:
Take your time
Avoid immediate impulse decisions. This is key to prudent windfall management. Among recommendations for this period are:
- Tell as few people as possible. Unfortunately, even those close to you may become resentful or solicit you for gifts when they hear about your windfall. You can always tell people later on when you have had time to consider the effect it may have on your relationships.
- Set aside six months to one year's worth of expenses in an accessible account, such as your checking account. Place the remaining windfall assets in separate accounts holding secure low-risk savings vehicles, such as FDIC guaranteed bank accounts and CDs, money market funds, and treasury bills.
- Use this time to begin resolving emotional, family, and social issues. Different sources of windfall, such as the death of a loved one, may have powerful emotional consequences that you should focus on addressing, while spending minimal time worrying about finances. Coming to terms with your emotions will allow you to make better financial decisions.[note 2]
- Hire a competent and unbiased tax professional, such as Certified Public Accountant (CPA), if you do not already have one. You may need to file estimated taxes. Complex tax issues may surround distributions from retirement plans, inheritances, and lottery winnings, as well as the exercise of stock options. If you are not sure if your windfall has tax consequences, many tax professionals will be willing to give you a free consultation. Prefer someone who does not sell investment products.
- If you have more complex finance issues that should not wait at least 6-12 months, skip ahead to the Get help step and pay a fair hourly rate for consultation from a fiduciary financial advisor, preferably one with a CFP or CFA certification. Urgent financial issues include having to decide whether to receive a lump sum or annuity stream; having a large amount of high-interest debt; or facing imminent eviction, foreclosure, or collection action due to delinquent debts. The focus of the consultation should just be resolving your urgent issues, not necessarily developing a complete financial plan or investing capital. The goal is not to begin putting your money to work, but rather to reduce stress and distractions by stabilizing your financial situation. Only make the minimum payments that will allow you to focus on the future, and do not redirect payments from paid-off debts to more spending.
Lump sum vs. annuity
Choosing between a lump sum or a stream of payments can be complex. Factors include your financial goals, expected investment performance, taxes, inflation protection, life expectancy, estate planning goals, financial health of the annuity provider, and others. If you are at all unsure of the best course of action, a consultation with a fee-only fiduciary financial advisor would be extremely valuable. However, most windfall recipients should lean strongly toward choosing the annuity, for these reasons:
- You are less likely to squander the windfall. You can lose a lump sum with just one bad financial decision, whereas squandering an annuity requires a series of many bad choices, and not learning from prior mistakes.
- The most common reason to choose a lump sum is expecting a higher rate of return than the effective rate of return of the annuity. However, most windfall recipients are investment novices who are less likely to reliably generate high returns from their investments. This makes the protection of principal plus guaranteed return of the annuity more attractive in comparison.
- You have less need to earn a high return, so the guaranteed return of the annuity is more likely to be adequate to support a comfortable and prosperous lifestyle.
This reasoning is very similar to why windfall recipients should pay off existing debts and avoid taking on new ones. These as well as any more general reasons that may apply, such as tax savings.
Think about goals
Begin to think about your long term goals, with more focus on the life you would like to create and (for now) less focus about how to achieve it. Some ideas for goals that may be meaningful:
- Retiring, either in the short or long term
- Cutting back hours at work, or dropping less desirable shifts or jobs
- Changing jobs
- Starting a business
- Going back to school, either to pursue a new career or just for enjoyment
- Saving money for benefit of a loved one (529 plan for education, trust fund, helping pay for a wedding or house down payment, etc.)
- Moving to another city, or country
- Paying off debts
- Certain consumer purchases
- Purchasing real estate
- Taking up a new hobby
- Growing your family
- Donating to charity
- Volunteering your time
Even a very large windfall will probably not be enough to fully fund all or even most of these goals, so it is important to prioritize your goals, both by overall priority, and by the time it will take you to reach them. Many financial novices are surprised how little of a windfall they are actually able to spend immediately. For example, a $1M windfall will only generate about $30-40,000 per year of investment income over the long run, so you will need to limit your initial spending so that the windfall can provide a lasting improvement in lifestyle. You can then formalize your specific goals, and allocation of money toward them, later in a written financial plan.
Like it or not, you now have a new job (in addition to any other jobs you may already have) - learning how to manage money. Whether or not you are inclined to "do-it-yourself", you will need at least the knowledge necessary to evaluate financial professionals. Learning about personal finance and investing will likely be, by far, the most money you will ever "earn" per hour, if it makes the difference between lifelong prosperity and a fortune squandered within a few years.
- Read some recommended books on personal finance and investing. Reading at least three, that cover the topics of personal finance and investing, would be a good start.
- Browse the rest of the Bogleheads wiki. Many articles are written to be accessible to readers with little or no investing experience.
Unless you are already an experienced investor, it may be beneficial to hire a professional, at least for some initial guidance. If you decide to use an adviser, in chapter 16 of The Bogleheads' Guide To Investing the authors recommend choosing an adviser who has earned a CFA (Chartered Financial Analyst) or a CFP (Certified Financial Planner) designation; uses a fee-only payment arrangement; and advocates an index fund investing approach. Fee-only compensation minimizes the advisor's conflicts of interest with your own financial success. A good financial advisor should be able to do the following:
- Calculate whether it is better to receive a lump sum or annuity stream of payments from a settlement, lottery winning, or retirement package
- Strategize about how to minimize taxes owed
- Recommend an investment strategy
- Recommend any additional types of insurance you may need, or what current types of insurance you hold may no longer be needed
- Determine whether you need to enlist an estate planning attorney[note 3]
You can get free portfolio reviews and answers to personal finance questions on the Bogleheads forums. Most forum members are not finance professionals, but are nonetheless experienced investors, and as a whole have managed an enormous range of income and assets.
Whether you should retain a financial planner for a long time, or do your own investing using the Bogleheads investment philosophy or similar, is a personal choice. When you have time, consider the "getting started" wiki article (and the rest of this one). The more you learn, the better you will be able to judge whether an advisor is worth the cost to you.
Creating a plan
Once you begin to become comfortable in your new financial reality, you may be ready for the successive phases, which include reviewing your situation and deciding how the money will be used. This is the fun part, when you'll choose -- with the help of... a solid financial plan -- whether to retire, buy a vacation home, donate to charities or set up trust funds for your children. The ultimate goal of all these steps is to create a sensible plan for handling your windfall that also allows you to come out with your relationships and sanity intact.— Susan Bradley, 4 steps to profit from a financial windfall
Financial planning is a long-term process[note 4] of managing your finances so you can achieve your goals and dreams, while at the same time negotiating the financial barriers that inevitably arise in every stage of life. Fundamentally, the process for financial planning after receiving a windfall is the same as in any other situation. The only differences are:
- Larger amounts of money increase the relative importance of certain aspects of financial planning, such as tax planning and tax-efficient investing, minimizing investment costs, asset protection, and estate planning.
- Windfall recipients are often thrust into a situation where they need to manage a large amount of money without having the necessary skills, knowledge, and experience.
- Serious emotional impacts often surround windfalls, which you must deal with at the same time as financial planning.
- The consequences of financial mistakes are higher, in terms of absolute dollars, with larger amounts of money.
The core of financial planning is matching your goals, and the financial resources they will likely require, with your available resources. These can be your present resources, but also future investment proceeds and any future earnings. Matching requires knowing the costs of your goals (both up-front and ongoing), how much of your available funds will need to go to taxes, and expected returns on various types of investments. Prioritize your goals, and then weight these priorities by the financial resources needed to meet them. The result is a detailed financial plan that lists your goals, describes when and how you expect to meet them, and that is robust to factors beyond your control, such as job loss, unexpected expenses, and market swings. A complete financial plan should address all of the following areas:
Work, income, and education
If you are currently working, plan how long you will continue to work. If retirement is a high priority, and your windfall allows you to live off investment income with a safe withdrawal rate (typically 3-4%), then you may be able to retire immediately. If you continue to work, include your expected future income in your financial plan.
The windfall may allow you to change jobs, start your own business, or get additional training that would enable a new career, so consider whether these options are desirable.
Decide where you would like to live, and include in your plan costs with moving and living there. Typically the largest financial factors connected to location are available jobs, cost of living (particularly housing), state and local taxes, and proximity to family (which can affect travel and childcare costs).
Your plan should include a location while working (if appropriate), and while retired. Differences in income tax rates can affect traditional versus Roth decisions.
Create a written budget that includes allocations for meaningful categories of expense (food, transportation, and so on), and has some cushion for unexpected changes. Everyone needs a budget, no matter how much money they have.
Include any immediate or planned future purchases, such as replacing an aging car immediately, or when it will reach the end of its life, and include saving for future purchases in the plan.
Consider both the up-front and ongoing costs of purchases. For example, windfall recipients often ignore the ongoing costs associated with expensive properties (property tax, maintenance, utilities, cleaning) or vehicles (fuel, insurance, maintenance, storage for the winter, and so on), which can be substantial.
Resist the temptation to spend a significant portion of a windfall on short-term consumption spending. The enjoyment you will get from investing and spending the windfall over a long period of time, and the comfort from having financial security, will likely far outweigh that from any consumer purchases.
Understand the different types of tax-advantaged accounts available to you (401(k), IRA, HSA, 529 plan, Defined benefit pension plan, and so on) and plan on using those that give you the greatest advantage.
Variable annuities (VAs) are usually high-fee products marketed by commissioned salespeople, which are inferior to tax-advantaged accounts and taxable accounts and are best avoided. However, low-cost VAs can make sense for some windfall recipients. If you receive a large lump sum windfall that cannot be rolled over into an IRA, and you intend to invest in tax-inefficient investments, a low-cost VA will allow you to defer taxes on interest, dividends, and capital gains. The tax deferral may offset the VA fees, which are around 0.25%/year for a good low-cost VA, such as from Fidelity. If you think a low-cost VA may be appropriate, consult with a third party fee-only financial advisor, who can help make sure the VA you are considering is well-suited for you and not fee-laden. See also: performance comparison between non-deductible IRAs and taxable accounts (non-deductible IRAs have the same tax structure as VAs).
Make sure any withdrawal restrictions (for example, penalties for non-qualified withdrawals from a 401(k) or IRA before age 59½) fit into your overall financial plan.
For further help on creating an investment portfolio, see:
Investing capital, and earning a good rate of return for an appropriate level of risk, is an essential part of almost all financial plans. Which investments are appropriate depends strongly on the time horizon of the goal you are saving for. For example:
- Short-term goals, within the next 3 years. Save using low-risk and low-volatility investments, such as savings accounts, money market accounts or funds, certificates of deposit (CDs), or short-term bonds.
- Medium-term goals, in the 3-10 year range. Save with slightly more volatile investments, such as intermediate-term bonds, and could include a small percentage of stocks.
- Long-term goals, 10 or more years away. These can contain a large percentage of higher-volatility higher-return investments like stocks and real estate.
Other key factors for choosing investments are need and willingness to take risk, and the consequences of falling short. See asset allocation for a more detailed discussion.
You should generally purchase stock and bond investments through low-cost passive mutual funds for diversification, reduced costs, and higher tax efficiency in a taxable account. Avoid purchasing individual stocks, due to the high volatility and risk of permanent loss.
You should be especially cautious with high-risk investments (for example, private equity, and startup companies) that have a significant possibility of a total loss. Most windfall recipients do not have the necessary experience to properly evaluate high-risk investments, and also do not have the need for higher than market returns. Windfall recipients are also often the targets of bad investments or scams; to reduce this risk, limit investments to diversified funds from respectable institutions.
All financial plans should include a list of all current debts and a plan to pay them off. Quickly pay off medium- and high-interest debts, such as credit card debts. See also: Paying down loans versus investing.
You should probably prioritize eliminating all debts, even low-interest ones, because the balance versus investing favors paying down debts more strongly than for more normal investors, for these reasons:
- Money put toward debt cannot later be inappropriately spent, or lost to bad investments or civil judgments. Historically, these have been common ways windfall recipients have squandered their fortunes.
- Once a debt is paid off, cash flow improves as a required monthly payment is eliminated. This is especially valuable when the windfall is a lump sum.
- The most common reason to invest instead of paying down a debt is the possibility for a higher return than the debt's interest cost. However, most windfall recipients are investment novices who are less likely to reliably generate high returns from their investments. This makes the protection of principal plus guaranteed "return" of paying down a debt more attractive in comparison.
- Windfall recipients have less need to earn a high return, so the guaranteed "return" of paying off debts is more likely to be adequate.
Similarly, you should avoid taking on new debts (for example, a large mortgage on an expensive new home), because servicing that debt will require good financial behavior over a much longer period of time, with many more opportunities for mistakes.
Because the US income tax code is progressive, taxes become a more important element of financial planning with larger income and assets. You will generally be able to reduce lifetime taxes with some basic tax planning. Common legal methods of reducing taxes include:
- Optimally timing the exercise of incentive stock options, sale of stock, etc.
- If applicable, appropriate choice of a lump-sum or periodic payment
- Maximizing use of tax-advantaged accounts
- Appropriate choice of traditional versus Roth tax structures
- Investing in municipal bonds and/or tax-managed funds if the expected after-tax return is higher than standard investments
- Taking advantage of step-up in basis and donating appreciated shares to charity
- Tax loss harvesting and, if appropriate tax gain harvesting
- Tax-efficient fund placement
- Appropriately-timed Roth conversions
- Relocating to a low-tax or tax-free state, especially when withdrawing from tax-deferred accounts.
Avoid tax evasion schemes, including IRS listed transactions and offshore tax shelters, because these have a high risk of legal problems and IRS levies. Many scams are marketed as tax shelters too. You should not need to take on these high risks in order to meet your financial goals.
As your assets increase, most financial experts recommend that you increase your liability insurance limits. Large assets, especially if others know or can find out, make you a more attractive target for lawsuits, so more protection is warranted. High limits on the liability portions of renter's, homeowner's, and auto policies are the best place to start. For more coverage, umbrella insurance provides millions of dollars of additional liability coverage, which stacks on top of other policies.
More assets mean that insurance deductibles can be raised. There is no need to pay higher premiums on a $250 or $500 deductible when a large reserve of assets can cover a $1,000 or $2,500 payment.
Reconsider the need for life insurance and disability insurance. If your heirs would be able to sustain an acceptable standard of living on the assets you have, you do not need life insurance. Likewise, if you could maintain a decent standard of living for yourself and your family on your assets with no income, you do not need disability insurance. Canceling these policies will save premium costs.
Long-term care insurance is not necessary if the windfall allows you to self-insure against the risk.
Permanent life insurance (including whole life, cash value life, indexed universal life, and others) is a hybrid insurance/investing financial product often marketed to high net worth individuals. In reality, the products have high fees and low liquidity, and are not ideal for either life insurance or investing; they are only appropriate for very rare situations. It is probably best to simply avoid permanent life insurance, but if you think it would be appropriate, get a second opinion from a third party fee-only financial advisor (preferably a fiduciary CFP or CFA advisor), and shop around from several insurance companies to make sure you get the best deal.
If you have put off buying any essential insurance (health and liability, and homeowner's, professional/malpractice, life or disability if appropriate), take this opportunity to fix this part of your financial picture.
Once you get out of debt, you should create an emergency fund that covers about 6 months of living expenses.
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts up to $250,000. If you are going to keep more than this amount in a bank account, consider dividing it among several accounts to keep your balance under this limit.
Asset protection seeks to protect assets from potential creditor claims. For the majority of high net worth individuals, simple and inexpensive asset protection techniques and good financial behaviors in general will provide more than adequate protection:
- Keep comprehensive liability insurance with high limits
- Maximize use of tax-advantaged accounts
- Pay off debts, and especially your mortgage if home equity is protected from creditors in your state
- Avoid activities likely to create liability (risky driving habits, keeping dangerous dog breeds, letting your teenager's friends borrow your boat, and so on)
- Minimize spending on flashy, expensive items that advertise your wealth
- Title joint assets as Tenants of the Entirety (in states where allowed)
- Keep potentially liability-generating assets, such as rental properties, inside a Limited Liability Corporation (LLC)
- Divorce is the most common cause of loss of assets, so choose a spouse that shares your values, and invest the time and energy into the relationship necessary to keep it healthy. Consider whether a pre-nuptial or post-nuptial agreement is appropriate for your situation; they often are when there is a significant disparity in assets, or when a spouse has children from a prior relationship.
More complex and expensive asset protection techniques, such as offshore trusts, cost tens of thousands of dollars to set up, and thousands of dollars per year to maintain. They are also far from iron-clad, and even their proponents concede that they are intended to only dissuade potential lawsuits rather than provide reliable protection. The cost/benefit trade-off is not favorable for most people.
Charitable giving can be a meaningful part of a financial plan. Especially if your windfall is large enough to at least cover your basic needs for the rest of your life, strongly consider at least some charitable giving for these reasons:
- It can enrich your life and be incredibly rewarding to help those less fortunate than you
- Giving can change your perspective on your new wealth for the better, and even help teach good financial management behaviors that will make your windfall last much longer. For example, rather than viewing money as something to be hoarded or spent on fleeting pleasures, you can grow to view it as a powerful force that can be applied to create good in your and your family's life, and in your community. Adopting a stewardship perspective on your windfall will create a positive experience when you give to promote your values, and will also encourage you to preserve and manage your windfall to last a lifetime.
- Charitable gifts are tax-deductible, so charitable giving can be significantly (although not completely) offset by tax savings.
Consider giving money to family or friends (to whom you would leave assets in your will) during your lifetime, rather than after you die. With life expectancies what they are today, your children could easily be in their 60's or 70's by the time you pass away, many decades past when they would be able to put a gift to the best use. Giving during your lifetime also lets you enjoy seeing the positive effects of those gifts.
While giving to family, friends, and charities can be immensely rewarding, take care of yourself first. While your windfall may seem like more money than you will ever need, progressive tax rates and the need for a low safe withdrawal rate may mean you have far less money available on an ongoing basis than you first imagined. It is okay to give, but prioritize this against other goals and include it in a comprehensive plan.
Carefully consider the effect any gifts or loans to family or friends could have on your relationships. Experience indicates that loans to family and friends often strain relationships, creating stress and resentment on both sides, especially if the loan is not paid back exactly in accordance to the agreement. Giving, rather than lending, is usually a better way to help that minimizes the impact to the relationship, and will also limit your outlay to what you can afford to lose.
Giving can also damage relationships, especially when the recipient is merely a friend or acquaintance as opposed to close family. After receiving a large gift, the recipient may feel pressure to behave a certain way (for example, spending time with you when it is inconvenient for them), and you may also wonder whether their friendship is predicated on the expectation of gifts.
Be extremely cautious giving or lending money to anyone with severe financial trouble, including close family and friends. Most likely, behavioral finance problems were the dominant cause of the trouble. Unless and until those problems are fixed, they will quickly be back in similar trouble, and any money you gave would likely be wasted on high-interest debts and unnecessary spending. Look for other ways to help, such as hiring them a good fee-only financial planner or even providing some financial advice yourself using your newly acquired knowledge, if you feel comfortable. Not everyone would be receptive to this type of help, and some people's behavioral finance problems are irreparable, so be prepared to disengage with them on financial topics and provide support in other ways.
Estate planning deals with preparing for your own death and the associated distribution of assets, and also planning for your own incapacity. Major goals of estate planning usually include:
- Ensuring that your financial affairs are managed the way you want them to, in the event you become temporarily or permanently incapacitated
- Ensuring that medical decisions are made in accordance with your wishes, if you are not able to make them yourself
- Ensuring that your assets are distributed the way you want after you die
- Avoiding probate, which is expensive, time-consuming, and creates a public record of your assets
- Minimizing taxes (income tax, estate tax, gift tax, inheritance tax, capital gains tax, and so on). As of 2022, the estate tax exemption is $12.06M for individuals and $24.12M for married couples; assets above these levels will probably require additional planning.
- Arranging for guardians for any dependents in the event of your death or incapacity
Trusts are common in estate planning, especially when large amounts of money are involved. A trust is a legal entity where assets maintained within the trust are managed and disbursed by the trustee for the benefit of the trust's beneficiary, according to the terms of the trust. Trusts can have a very wide variety of purposes and structures. Appropriate uses of trusts include:
- Requiring assets willed to a beneficiary to be spent in a particular way that aligns with your values, for example, allowing trust funds to be spent only on higher education and certain other expenses
- Distributing assets over a long period of time, rather than all at once, for example, to reduce the chance of mismanagement for a younger child or an heir without the capacity to manage a large amount of money
- Avoiding estate tax, for example, with an Irrevocable Life Insurance Trust (ILIT). A-B trusts were also commonly used for this purpose before the estate tax exemption became portable between spouses.
Estate laws are state-specific, so consult an attorney in your state who specializes in estate planning. A good estate planning attorney will work with you to determine your needs in all these different areas, and create the documents and trusts you need to execute your estate plan.
Monitor progress and make necessary adjustments
At least once per year, check your your progress toward your goals, and consider the following checks and adjustments:
- Check your actual spending against your planned budget. The tendency to gradually increase your spending is known as lifestyle creep. If you find your actual spending significantly exceeds your plan, evaluate the reasons why, and either reduce spending on the items that provide the least value, or adjust your financial plan to include higher spending. Raising your spending could delay or prevent you from reaching certain financial goals.
- Monitor the performance of your investments and rebalance as necessary. Avoid any temptation to panic-sell either at market highs or lows. Stay the course.
- Stay up-to-date on changes in tax laws, and change tax strategy if necessary.
- Reevaluate your insurance needs, and shop around with other insurance companies to make sure you are getting the lowest rates on policies, especially if your situation has changed significantly.
- Reevaluate your estate plan. Beneficiaries may need to be changed, new trusts may need to be created, or old trusts may no longer be necessary. Estate tax laws also change frequently, so changes may be needed to avoid taxes.
Avoid the temptation to tinker with your plan and investments unnecessarily. Hot new investments often get covered by the press and on social media, usually after their price has been run up on speculation. Buying into the top of a bubble usually means you will lose a lot of money when the bubble bursts. If you think your investment plan needs a change, it is probably worth a consultation with a fee-only financial advisor.
- A wide range of responses can accompany a financial windfall. People who have received windfalls report experiencing a selection of the following emotions as they adjusted to their new circumstances.
Emotional reactions to windfalls
- Fear of loss of money
- Fear of a change in relationships with others
- Inability to see the money as a gift or an advantage
- Not knowing what to do with the money
- Feelings of unworthiness
- Lack of confidence
- Desire to give it all away
- Lack of identify
- Sense of loss
- The emotional and social issues surrounding windfalls are explored in greater detail in the following links:
- How You View Yourself, Amy Domini, Sharon Rich, and Dennis Pearne: Excerpt from The Challenges of Wealth (Homewood, Ill.: Dow Jones Irwin, 1988), a book on the psychology of wealth.
- 4 steps to profit from a financial windfall examines emotional issues involving individual behavior, family dynamics, and inheritance.
- Financial Psychology and Lifechanging Events is a good general guide.
- Entrepreneurs: Life after Exit examines issues involved in selling businesses.
- The authors of The Bogleheads' Guide To Investing recommend Martindale-Hubbell for checking out the credentials of an attorney.
- Sound financial planning incorporates these steps:
- Establish a relationship with a CFP professional
- Gather your data and develop your financial goals
- Analyze and evaluate your financial status
- Review your CFP professional’s recommendations
- Set your course
- Benchmark your progress against the financial goals you established
- "Financial Windfall" (PDF). NEFE. 2002. Archived from the original (PDF) on November 12, 2020.
- "Chapter 15. How to Manage a Windfall Successfully". The Bogleheads' Guide To Investing. Wiley. p. 180. ISBN 978-0-471-73033-0.
- "IRS provides tax inflation adjustments for tax year 2024". Internal Revenue Service. Retrieved November 14, 2023.
- Stephen L. Nelson. "Financial Planning for a Windfall in Wealth: Lotteries, Stock Options, Inheritances and Other Surprises". Retrieved August 11, 2023.
- Miriam Caldwell (February 1, 2019). "What to Do With a Sudden Windfall?". the balance. Retrieved May 30, 2020.
- Michael Kitces (December 12, 2018). "Unwinding An "Irrevocable" Life Insurance Trust (ILIT) That's No Longer Needed". Nerd's Eye View.
- "A-B Trust Definition". Investopedia.
- Vanguard Your Investing Life: Managing Financial Windfalls[dead link]
- Bogleheads forum topic: , fyre4ce. June 1, 2020