Many people who are in early retirement or nearing retirement still have one or both parents living. And while they may be aging gracefully, at some point they will pass away. Whether they had significant investment assets or just considerable equity in their home, their passing may mean a significant financial windfall for their heirs.
There are healthy ways and less healthy ways to handle such a financial windfall. For example, if one decides to buy that expensive European sports car they've always coveted, consider how children or grandchildren may feel about that choice if they could use a little financial help (not to mention the thought of careening down the highway at 80 miles per hour).
Consider a Money Moratorium
There are basically two types of financial windfall. One might be in the tens of thousands, for example. Not a life changing amount, but a big help if one is carrying a significant amount of consumer debt or could use a little boost to one's retirement accounts. But it’s the idea of a larger windfall, involving hundreds of thousands of dollars, that really requires some good hard work.
A good first step in the event of a large financial windfall is to declare a money moratorium. Park the cash in a money market account or a short-term CD for three months or so. This serves two purposes. First, it makes it a lot less likely that the money will be spent quickly. And second it gives one time to think carefully.
Seek Help With A Big Windfall
The next step is to make an appointment with a financial adviser. This person can discuss options that the windfall recipient may not even be aware of, but also can provide sound, objective advice. After all, the dispersal of a windfall itself can be complicated. A person is unlikely to be handed a check for their entire windfall. Most likely they will receive a combination of cash, investments, property, and other assets. The entire portfolio can be complicated, and may have been largely ignored in the later years of someone's life. A professional can help sort all this out.
There are also complicated tax considerations involved with a large windfall. But mostly a windfall recipient will simply need help deciding what to do with the assets received. There are many options, including having a little fun. Many experts say it’s fine to use as much as 10% of a windfall on an indulgence, if the money isn't needed for other purposes. So start looking through those brochures for three-week European cruises or whatever.
Look at Financial Needs
The most important first step, however, is for a person to use proceeds from a windfall to address their own financial needs. Any debt that is not directly related to a home mortgage should be paid off. Together with a financial adviser take a good hard look at existing retirement funds. Is there enough money invested to ensure that a person can continue their current lifestyle into a reasonable old age? If it’s close, take a good chunk of the windfall and add it to one's investment portfolio.
It's also a good idea to consider shopping for long-term care insurance. If one or both spouses ever needs long-term care, at home or in an outside facility, this insurance will ensure that savings are not wiped out.
Beyond that consider family members. Together, two spouses can give a tax-free gift of up to $20,000 per year to any child. They may appreciate the help more now, while their parents are alive, than they would when later. In addition, consider grandchildren. Just one grandchild going to a four-year private college may require $150,000 or more. A gift now can do a lot to ease that burden and maybe relieve them of many years of hefty student loan payments. If they’re not ready for college yet, consider setting up a 529 college savings account.
Don't Let the Windfall Be a Burden
Lastly, try not to consider the windfall a burden. It may seem strange to think that a large amount of money could be a burden, but it can. Some people worry that they will do something wrong or that they’ll trigger resentments within the family based on their decisions. Initiate open and honest communications with family members and work closely with a financial professional who can help make sure that these problems don't happen.
 |
