An extra $100,000 to play with should be fun, right? (That's why lottery tickets were invented.) It could seed a new business, make a substantial down payment on a beach house, go toward an extra year of easy retirement, pay for a month in Tuscany. But how you get the money turns out to be just as important as how much it is and what you do with it.
Our generation is part of what's expected to be the largest intergenerational wealth transfer in history. Of course, that money comes with emotional strings: The pleasure of an inheritance can be tempered by grief or guilt. Even if no one died, the thrill of a settlement or severance can be darkened by divorce or job loss. Although plenty of midlife women would know exactly what to do with a windfall, others are stymied. “What often happens is that the person who comes into the wealth is deathly afraid of changing what she's got, or she won't invest it in anything but money markets and CDs,” says Micah Porter, a financial planner in Atlanta. “And that won't give her the return she needs.”
More found three women soon after they got sudden windfalls and asked them to tell their stories. Whether by accident or design, all were doing the right thing: nothing. “You need to let the money sit while you consider your priorities and goals,” says Susan Bradley, certified financial planner and founder of the Sudden Money Institute. “Only make essential decisions, like how to pay the taxes.” We put them in touch with financial advisers to help them figure out what to do next—and they ended up with sound advice on dealing with large sums of money.
A job loss with a silver lining
Her windfall: $700,000
Where she got it: Severance package, stock options
Her goals: Start a business, continue to support her parents and help out with her grandchildren's college savings
Susan was a vice president of a major insurance company until about a year ago, when her division was sold. She left with roughly $200,000 in severance and $500,000 in stock options. “I've tried to look at this as a great opportunity to figure out what I want to do next,” she says. Susan decided she'd like to start her own financial planning business. “It's very scary,” she says. “I've been employed full-time since I was a teenager. I'm basically starting from scratch.”
She's not in any debt beyond her mortgage, and she has more than $1 million in retirement savings, but she has been spending freely. She fulfilled a lifetime ambition and rented an apartment in Manhattan for a year (in addition to maintaining her house in Atlanta), and she took trips to Jackson Hole and California. Now she has gone through all but $40,000 of her severance package, and her stock options begin expiring in March. In addition to her other expenses, Susan pays $400 a month for her elderly parents' health insurance and sends them roughly $5,000 beyond that each year, an expense she considers nonnegotiable.
* This name has been changed.
THE EXPERTS SAY…
Certified financial planner, president, Asset Planning Inc., Los Alamitos, California
Fund an IRA
Since Susan wasn't involved in a 401(k) plan this year, she could make a full $5,000 IRA contribution, and the tax deduction will help her come April.
Safeguard those stock options
Susan should set limit orders—orders to sell a certain number of shares when a stock's price reaches a specified number.
Don't forget an emergency fund—for her parents
They don't have a long-term care policy, and Susan is helping to support them now. Medicare offers very little toward in-home health care, and nursing homes can be expensive. As Susan runs through her stock options to support her new business, she should put money aside to cover a worst-case scenario.
Chartered financial analyst, president, Minerva Group, Atlanta, Georgia
Underestimate any future earnings
Typically, the type of person who starts a small business is pretty optimistic, especially regarding the money she'll be pulling in. When Susan predicts what she's going to make, she should start with a conservative number, then cut it in half. That way, if business isn't up to the level she expected, she won't have to dip into her reserves.
Get a grip on taxes
With large lump-sum payments, such as Susan's severance package, “You don't want to get to the end of the year and find out there's a tax liability you didn't expect,” Porter says. Susan should talk to an accountant now to know what she'll owe.
CFP, CCP Inc. Financial Planning Services, Palatine, Illinois
Exercise the options early
Susan's stock options aren't all due to expire until 2011, but her income will likely be pretty small until she gets her business established. So it's probably in her best tax interest to exercise the majority of the options in the next two to three years, even if the stock is off its high. That way, the stock options will make up the majority of her income while she's in a lower tax bracket.
Identify needs versus wants
As Susan pares down her expenses, it will help to identify the fixed outlays and the nonessentials. Providing financial support to her parents isn't optional, but putting money toward her grandchildren's college fund could wait.
Real estate paying off
Her windfall: $60,000
Where she got it: Her condo appreciated
Her goals: Buy a single-family home, save for retirement and pay off student loans
About three years ago, Laura bought a one-bedroom condo for $110,000 and then watched, bemused, as the value quickly shot up to more than $200,000. “It was really fun to see the price just keep going up and up and up,” she says. Now married and five years out of law school, she lives with her husband in a two-bedroom condo and has been renting out her other place. Laura figures that even with the equity loan she took out on the one-bedroom (which she used to pay off debt), she could clear some $60,000 if she sold it. She and her husband would like to buy a house, but she's afraid of getting burned in today's volatile real estate market. “I don't want to put everything I own into things that could lose value,” Laura says. And since her rental property is hers alone (premarriage), she'd like to put those proceeds toward something personal.
THE EXPERTS SAY…
Stuff more into retirement
Laura is currently maxing out her 401(k) contributions, but with a current balance of only about $22,000, she's got a ways to go. In addition to her 401(k), she should put $4,000 into an IRA for both the 2007 and 2008 tax years. (A Roth IRA would be better, but she and her husband make more than the $166,000 cutoff to qualify.)
Pretend to have a bigger mortgage
A single-family home in her area will run Laura and her husband a great deal more than the two-bedroom condo. They should start putting an extra $600 or $700 into savings each month to simulate higher mortgage payments, help them trim expenses and fund the down payment.
Set up an investment fund
After starting an emergency account, paying off her student loans and funding a couple of IRAs, Laura will have enough left to put into an investment portfolio. “She could set up an account,” Sandra says. “Something low risk and with as much return as she can get on it.”
Don't let the housing market scare you
Laura may get less if she sells the condo, but she and her husband will likely realize those savings on the house they buy.
Compare the condo to a stock
To help her make the sell-or-keep decision, Laura should figure out which investment would make her more money—stocks and bonds, which, with the right mix, typically return nine to 10 percent a year, or the condo market in northern Virginia. If real estate is stagnant, it may be time to sell and put the money to work elsewhere.
Don't consider it a windfall
This isn't really “found” money—it's appreciation of an asset, which is just proof of a good investment. Until you sell that asset, it's an unrealized gain. Don't count on it, and don't forget to calculate costs such as closing fees when you estimate your winnings.
Set up an emergency fund
The general rule is to put three to six months' living expenses in a fairly liquid account, like a money market account. If Laura sells the condo, she should use some of the proceeds to set one up.
Pay off unsubsidized student loan debt
Laura is carrying about $30,000 in unsubsidized student loans with an interest rate of eight percent. Paying them off would be like getting an eight percent return on her investment, which is a pretty solid yield. After the emergency fund, the condo proceeds should go toward this.
An unexpected inheritance
Her windfall: $600,000 plus roughly $18,000 a month (indefinitely) in gas interests
Where she got it: Her mother's estate
Her goals: Retire; continue to pay for her own health insurance, since she's self-employed; give back to the community
When Michelle's mother died last March, Michelle was floored to learn that she'd be inheriting more than half a million in cash and receiving between $12,000 and $24,000 a month from her mother's gas interests. Michelle has no idea what to do with all that cash, although she has used some of it to pay the balance on her credit cards. “When I paid off my debt, it was ‘Thank you, God’ and ‘Thank you, Mama,’ ” Michelle says. “She always took care of me.”
Money wasn't exactly free-flowing when Michelle was growing up. “My mother would buy one pair of good pants and one good white blouse, and she'd take very good care of them,” Michelle says. “She saved the good towels for special occasions and drank orange juice out of Flintstones jelly glasses. She lived a very frugal life.” Michelle, who is single and has no kids, owns a promotional sales company and would like to be able to retire early and spend more time volunteering. “I do not want to be that person who blew such an unexpected gift,” she says.
THE EXPERTS SAY…
Don't invest it all at once
“Michelle falls into the category of people who would be mortified if they squandered an inheritance,” Field says. “She's very different from a lottery winner. She's going to have an emotional attachment to the money.” To make things easier, Michelle should work with a financial adviser to figure out how much to invest. Then, she should invest the first third of that amount now, the second third in six months and the last third in one year. That way, a volatile market won't wipe her out, and the process will help Michelle get used to investing.
“One million isn't what it used to be,” Field says. Michelle still owes $200,000 on her mortgage, and she doesn't know yet how long her mother's gas interests are going to provide income. An adviser can help her find the magic savings number at which she can quit her job.
Write a very specific will
Since Michelle has no spouse or descendants, she should make sure that she sets up a trust with designated beneficiaries and that she has a current will. “The worst thing is to not name exactly whom you want things to go to and let the state decide,” Field says.
Find out how long the energy interests will last
If there's a way to estimate the lifetime of the gas lease, Michelle should do it. “That will play a huge role in determining how quickly she can meet her financial goals,” Porter says.
Revisit personal goals
Michelle should sit down and map out her short-term goals (less than five years) and her long-term goals.
Consult a fee-only financial planner
Since they don't get commissions, they're more interested in making you money than in selling you a product. Find one at napfa.org.
Start with dollar cost averaging
Easing herself into the market, Michelle might invest a set amount of money on a regular schedule. When prices are low, she'd purchase more shares. When prices are high, she'd buy fewer.
Then there's the big surprise
Even if you don't have a lump sum to invest right now, you can hope to get as lucky as Elizabeth Gibson, 54, of New York City. Four years ago, she was on an early morning stroll when she spotted a vividly colored painting that had been left out with the trash. She started to pass on by—but something about the painting compelled her to take it home. “The next day I asked the doorman how long it had been out there, and he said 20 minutes,” she remembers. “And he told me that 20 minutes after I took it, the garbage man came.”
Last May, Gibson learned the painting was a stolen twentieth-century masterpiece by Mexican artist Rufino Tamayo, worth $1 million. By returning it, Gibson gets more than $15,000. “I want to use some of it while I write a book,” she says, “and if it's a best-seller, then I'll get a face-lift!”
Related: Family-Inheritance Feuds
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