Handling a Financial Windfall

Handling a financial windfall sounds easy. But the fact is, most people don’t know how to manage such a large amount of money – and that means getting professional advice is a must.

A lot of us think, ‘Wouldn’t it be great to have a nice windfall drop into my lap? A sizable lottery win or an inheritance could put me back on the rails financially and help guarantee a comfortable retirement.’

That scenario doesn’t always pan out, but when it does, it seems for certain people it would have been better if the money had never come at all. They just aren’t experienced in dealing with such large sums.

Warren Mackenzie, principal at Highview Financial Group in Oakville, Ont., thinks this largely depends on age, since people who, for instance, are in their 50s and have some investing experience – and have likely made mistakes – are more able to deal with the financial windfall.

“I don’t know the exact percentage but it’s more than half of people that win lotteries wind up in bankruptcy in a number of years. And if that happens, they regret it for the rest of their lives,” said Mackenzie.

“It’s worse than never having the money, to think that I blew a chance.”

Yet such a windfall can be a golden opportunity to get your savings and retirement goals on track if you start off right. So, number one, don’t do something rash – like quitting your job.

“First of all, maybe you don’t have enough to retire in your 30s or 40s,” said Mackenzie, adding that a hasty departure from your current company could mean you have to get another job down the road.

“People underestimate the importance of work,” he adds.

“If you’re not doing something, you go crazy.”

It’s also important to get a grip on how much money you really have.

If it’s a million bucks or more, it might easily mean you could retire if you wanted to.

But on the other hand, “if it’s $100,000, it might just mean that if properly invested it relieves the worry about how to (partly) fund your old age,” Mackenzie said.

You can also view this as a chance to get a retirement/investing plan together. Don’t have a good financial advisor? Now would be a good time to hold auditions.

Many people think they can go it alone because they have a natural bent for investing, but they don’t, so it’s crucial to talk to someone who can help get you on the right path.

“(People will) also think that the secret is to find the best stock,” said Mackenzie, but it’s not the investment product so much as the investment process that will guarantee success.

That process involves getting into the right asset mix, being well diversified and then rebalancing as needed.
To find the right partner, Mackenzie recommends talking to three potential advisors.

“You could interview them by phone and just say, ‘I have some money I would like to invest but would you show me an example of your investment policy statement,?’” he said.

“And then, would you take a name off one of your client’s statements, someone you have been with for five years, take their name off and show me a copy of their statement. A good statement will show performance compared to the proper benchmark, (which will be) set out in the investment policy statement.”

This doesn’t mean you can’t make some room in the plan for enjoying yourself. It just means that you have to get your priorities straight. Once you determine your major goal, you can figure out how much you can take out for play money.

“Maybe the big goal is a house or educating your kids,” Mackenzie said.

“There’s happiness in the short term like a great vacation as well. It’s just a matter of knowing the cost and how the cost of the holiday (will impact). You choose whatever will give you greater happiness.”

2 years ago