Handling a Financial Windfall

As a followup to my recent post about how athletes go broke, I wanted to highlight a recent article by Linda Stern. In it, Stern looked at steps to take if you’re fortunate enough to be the recipient of a major financial windfall.

This advice applies equally well to those who have inked a major signing bonus, won the lottery, accepted an early retirement buyout, taken a lump sum in place of an ongoing pension, received a major life insurance payout, inherited a boatload of money, etc.

Her advice (as summarized by me) is as follows:

1. Decide if you really want it. For starters, if you have a choice in the matter (e.g., a lifetime pension vs. a large one-time payout) you’ll have to think carefully about which option is best. There are risks both ways (e.g., solvency of the payer vs. your ability to make a lump sum last). Perhaps the windfall isn’t in your best interest after all.
2. Tuck it away safely. Once the windfall is yours, don’t make any rash decisions. Stash your cash until you’ve had time to sort our your options. Just be cognizant of FDIC insurance limits when doing this.
3. Think about taxes early. Don’t get caught with your pants down at tax time. If it’s a tax advantaged payout, you may need to roll it over to a like account to avoid facing a huge tax bill. If you’re inheriting securities, be aware that the cost basis steps up upon transfer and that you don’t need to wait to sell. And if it’s just plain old income of some sort, be sure to set enough aside for the tax man.
4. Treat the money as special, but in your own way. Just because you inherit shares of a beloved (by your grandparents) company doesn’t mean you need to hold them forevermore. Be willing to deploy the windfall in a way that makes sense with respect to your needs/goals and your overall collection of assets/
5. Deploy it gradually. Unless the money is a small part of your overall assets, don’t be in a rush to deploy it all at once. Instead, dollar-cost average over a period of 6-12 months.

All in all, pretty standard stuff… Though point #5 might be the subject of some disagreement. One might argue that, if your allocation is right, you shouldn’t be afraid to deploy your cash all at once.

Of course, if you’ve come into a substantial sum of money, your need to take risk decreases and you might want to adjust your holdings accordingly even if you’re comfortable deploying the entire windfall at once.