So, You Just Received a Financial Windfall

July 11, 2022

What would you do if you received a major financial windfall? Would you buy a new house or vacation home, give money to your family members, donate to your favorite charity, or travel like you’ve always dreamed of?

While many people will not receive a major financial windfall, or unexpected financial gain, during their lives, it is not uncommon. You might receive sudden wealth by:

  • Getting a large inheritance
  • Earning a big payout from employer stock compensation
  • Selling your company
  • Selling real estate property
  • Receiving a legal settlement due to divorce or injury
  • Signing a mega contract as a professional athlete/artist or winning the lottery

So, while receiving a sudden appearance of a large amount of money may seem great, it can also have significant impacts and challenges. For example, according to the National Endowment for Financial Education (NAFE), an estimated 70% of people who receive a large lump sum of cash won’t have any left within a few years.1

However, handled properly, receiving a financial windfall can be a huge boost and help you achieve many, if not most, of your financial goals. So, let’s look at some of the possible issues you might face and how you can effectively navigate them.

Five pitfalls of sudden wealth

One of the major keys to preserving your newfound wealth is to avoid traps and manage challenges like the scenarios below:

  1. Sudden wealth can take an emotional toll. This can happen in so many ways. For a business owner who sold their business that they worked hard to build, there is often a loss of sense of purpose and identity after the business is sold. People receiving an inheritance can be conflicted between wanting to use the money for things that they feel are important, but also may want to honor the deceased relative by not touching the money they were given.
  2. Giving away too much money. Often when someone receives a financial windfall, they are approached (and often pressured) by many different people who are looking for money. It could be for donations for a favorite charity; it could be a relative, a friend, or a previous co-worker looking for a loan or funds to start a new business. When people give loans or invest in new businesses in these situations, they almost never get their money back. If you give or loan too much of your wealth away before understanding the real impact, you may erode your wealth faster than you had anticipated.
  3. Nonchalant or extravagant spending. Treating yourself is fine, but in many cases people who receive sudden wealth treat that money differently and spend it more frivolously than if they had earned it. If the money needs to last a long time, excessive spending can jeopardize your financial future. The key is to discern what is truly important to your long-term goals and what is not.
  4. Choosing the wrong professional advisors. After receiving a windfall, there likely will be many people seeking to help you manage your investments and other planning needs. Equally likely is that many of these potential advisors don’t have the skills to meet your needs. To get the right professionals on your team, it’s always a good idea to get referrals from people you trust. Take the time to interview them to find the best fit with your values, goals, and needs.
  5. Potential lawsuits. Your newfound wealth can make you a magnet for potential unwarranted lawsuits. You can address this in several ways, first by working with your insurance carrier to make sure you have appropriate specific insurance coverages, including umbrella liability coverage, in place. Next, by working with your advisor team, you can build legal and other barriers between potential litigants and your wealth that will discourage potential lawsuits and protect yourself in the event a lawsuit arises.

Realizing the potential

If you, a family member, or someone else you know is somehow fortunate enough to receive a financial windfall, below are four steps that we recommend taking to help you best realize its potential positive impact.

  • Take your time. Catch your breath. Don’t make any unnecessary or rushed decisions. There is time for all the decisions that you need to make. Because receiving an unexpected lump sum of money brings with it a wide range of new issues, things to think about, and emotions, it’s best for you to slow down and work through these things to think clearly about your windfall and its impact.
  • Envision your future. First, make a timeframe for yourself during which you’ll be able to think long term and develop a clear vision of what you want to do for yourself, your family, and others in this world. This period can vary, but 3-6 months would be a good starting point to consider. Sticking to this timeframe is important if you want to develop a sustainable long-term plan and avoid the pitfalls that you may be facing. So, make a wish list and try to get as clear as possible regarding what you would like for your future. Understand the assets, investments, and liabilities that you currently have. This will be very helpful when working with your own team of trusted advisors, which you’ll develop in the next step.
  • Build your team of trusted financial professionals. Because your financial situation will have changed significantly, it’s important that you put together a team of experts that can help you plan and execute your vision for the future. To start, your team should include a CPA, financial advisor, estate planning attorney, and possibly a property/casualty insurance professional. You want to work with true experts—people who have experience working with people like you and who can help you chart a financial course that matches your needs and wants.At Mercer Advisors, we believe it’s very important to work together, which is why we have a team of wealth management professionals including, CERTIFIED FINANCIAL PLANNER™ professionals, investment advisors and strategists, estate planners, attorneys, tax professionals, and Certified Public Accountants to collaborate with you. This helps ensure that everyone is on the same page, and that there is agreement among your advisor team regarding the steps that you should be taking. And moving forward, your team can act as a sounding board to help you think through different situations and ideas as they arise.
  • Create a plan and put it in place. Once you have your professional team in place, you should work with them to develop a plan that best fits your goals relative to the windfall you received. This plan should be realistic in terms of how much you will be able to spend and should also reflect your values and goals along with things you may want to do for your loved ones and others. Your plan should also address the things that you and your advisors are concerned about. Once your plan is in place, you should continue to be self-aware of your overall situation, be disciplined with your life-long spending habits, and—while consulting with your advisor team—make intelligent and informed decisions.

Receiving a major financial windfall can give you and your family financial security and provide you with opportunities you never thought you might have. To help set yourself up for success, avoid the pitfalls and follow the steps above to help you best realize the potential lifelong benefits your new wealth has given you.

Footnotes:

1 8 Smart Ways to Handle a Financial Windfall, Alert Investor Staff, www.finra.org October 27, 2015


Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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