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What to Do With a Sudden Financial Windfall

The beginning stages of a windfall can be very stressful, according to Susan K. Bradley, a financial planner and founder of the Sudden Wealth Institute. It can be hard for your mind and body to absorb the change, she says, but it is important to work through all aspects of the windfall with a trained financial adviser.

November 24, 2022
12 minutes
minute read

What if you suddenly had the money to buy something you've always wanted, travel to a place you've always dreamed of going, or make a real difference to a charity you admire? Just imagine the possibilities!

It's a problem we'd all like to have, but it's still a potential problem.

You need a plan to manage your money wisely, and the same is true when you come into sudden wealth.

Sudden wealth can take many forms. A lump-sum pension payout, a substantial inheritance, legal damages in a lawsuit or the sale of a business can all result in riches that can reshape the recipients’ lives—for better or worse. That’s because vast amounts of cash come with an array of decisions, each with the potential to squander or invest the money, increase or decrease happiness, and bolster or torpedo close relationships.

The beginning stages of a windfall can be very stressful, according to Susan K. Bradley, a financial planner and founder of the Sudden Wealth Institute. It can be hard for your mind and body to absorb the change, she says, but it is important to work through all aspects of the windfall with a trained financial adviser.

It typically takes three to five years for people who come into sudden wealth to work through all the issues and feel more grounded, according to Ms. Bradley.

Ms. Bradley worked with a woman who had inherited a multimillion-dollar estate. The woman had to deal with the anger and resentment of other family members who had received only nominal inheritances. Ms. Bradley says it took the woman three years to create a new life and feel like she belonged in the world.

Having a confidant is important when coping with a multimillion-dollar windfall, according to Ms. Bradley. This is someone who can act as a sounding board to help you work through all the ideas and possibilities that come with newfound money. Ms. Bradley knows of a Catholic nun who won a lottery jackpot and confided in the school crossing guard, who was a good friend.

The second key to financial success is having a team of advisers who can review your existing finances and help you navigate the best investment options for your future. They can also help you set up an estate plan, strategize on taxes, and ensure you have adequate insurance coverage. Having this team in your corner will help you make the best financial decisions for your future.

Ms. Bradley also suggests that windfall recipients consider seeking out a mental-health professional to help them deal with the emotional aspects of their sudden wealth. She says that sudden wealth can "mess with your head," and it may be helpful to have someone to talk to who can help you navigate these new waters.

The advisers would work together like a board of directors to track and manage the windfall recipient’s finances, Ms. Bradley says. Together they can fend off predators—friends or family members who aggressively scheme for handouts. Financial accounting should be transparent to all board members, creating a system of checks and balances that could spot theft or mismanagement.

When choosing advisers, it is important to carefully research potential candidates, as not all professionals are honest. For example, in July a New York attorney who called himself “the lottery lawyer” was found guilty of wire fraud and money laundering in scams that bilked big-time lottery winners of more than $100 million.

This advisory team is structured much like a family office, which is a private wealth-management firm that serves multiple generations of an ultra-high-net-worth family. At Summit Trail Advisors, a family office based in Chicago, we have a deep understanding of the unique financial needs of entertainers and professional athletes. Many of our clients come from modest backgrounds, and we are committed to helping them achieve their financial goals.

He advises that the best course of action may sometimes be to do nothing at all. This doesn't mean being idle, but rather finding a safe and intelligent way to preserve capital, such as investing in municipal bonds.

Many pro athletes go from living in a dorm room with five roommates to signing a $50 million contract. According to one source, their impulse is to immediately buy houses or hand out massive amounts of cash to family members, coaches and mentors who helped them succeed.

Instead of simply giving their clients' money away, the advisers at the firm work to find smart ways for their clients to help others. For example, Mr. Lee has a client who recently signed a huge contract in the NBA. This client wanted to give his five brothers opportunities instead of simply giving them cash. So, the firm created a strategy that would allow the player to finance businesses that the brothers could run. This way, they would have their own income streams.

According to Mr. Lee, the best way to help a client is to have an open and honest discussion about what is fair and what will work. Once you have a plan in place, everyone will know what is expected of them and there will be no confusion. Without a plan, it is easy for things to get out of hand and for people to take advantage of the situation.

The goal of asset protection and growth is one that Mr. Celenza is committed to achieving for both current and future generations. This can be difficult at times, as was the case with a client who loved to tap into his holdings to make private investments. In response, Mr. Celenza's firm created a portfolio designed to generate a steady stream of income.

"The client's advisers gave him long-range projections based on his current spending, helping him realize that the risks weren't practical," Mr. Celenza says. "We are very vocal about what's right and wrong."

When you come into a large sum of money unexpectedly, it's not just about making sure there's enough money. It's also about making sure the money is used in a way that makes the recipient happy. Otherwise, it's just money for the sake of having money.

According to a 2019 study, how people choose to spend their windfall has the greatest impact on their overall happiness in the long term. The authors, Israeli academics in behavioral economics, developed a model showing the short-term and long-term effects on the recipients' happiness, which fluctuated over time. In general, the authors found that winners who quit their jobs and engaged in a lifestyle of passive leisure were less happy than winners who devoted their riches to social pursuits and other activities that gave them pleasure, such as travel, hobbies and volunteering.

According to Robert Östling, a professor of economics at the Stockholm School of Economics, the idea that many lottery winners end up broke and homeless is largely a myth. He was part of a team that looked at the long-term effects of lottery winnings on psychological well-being, and the study was published in 2020. The team analyzed the results of a survey by the Swedish government that included responses from 4,800 people who had won a lottery five or more years earlier.

According to the research, the long-term effect of winning the lottery on happiness is too small to detect. However, there was a slight improvement in overall life satisfaction. Dr. Östling says this is not particularly surprising because richer people tend to have higher life satisfaction.

The purpose of each study was different, but both were essentially trying to answer the question: Can money buy happiness? The first study used a survey to ask people how much money they made and how happy they were, while the second study looked at whether people who won the lottery were happier than those who didn't.

According to Dr. Östling, money does not have a significant impact on life satisfaction or happiness. Although people instinctively want to earn more money, they overestimate its importance in terms of happiness.

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