Aging Options

Steps to take after receiving a large lump sum payment

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Winning the lottery doesn’t make the top 10 sources of retirement income, yet it’s often a major part of many people’s retirement plans.  The top ten list by the way goes something like this:

  1. Retirement savings accounts
  2. Home equity
  3. Pension plans
  4. Social Security
  5. Certificates of Deposit
  6. Stocks and mutual funds
  7. Retirement jobs
  8. Annuities or insurance plans
  9. Inheritance
  10. Rent and royalties

Still, winning the lottery has something in common with several of the items on that list and a few extras such as severance packages, bonuses, life insurance payoffs, or money from selling a business, real estate or stock options.  What all of those have in common with the lottery is the sudden influx of seemingly large amounts of cash.  So while, you probably don’t need tips on what to do should you win the lottery (with odds of 1 in 200 million the odds are against you), you just might need some pointers about what to do about those others.

It’s tempting when you get a lump of cash to take the entire family on a family vacation or put grandchildren through college but the very first thing you should do before you touch so much as a penny is to hire a professional.  There’s a reason why 70 percent of all people who do win the lottery have spent everything in their first five years after winning.  That reason is that they don’t have the big picture idea of what having a lump sum means tax-wise, relationship-wise, or future-wise.  One article notes that anytime you receive unexpected money, you’ll receive the money with one hand and a tax form with the other.  A financial expert can prevent you from owing more money down the line than what you actually received.  Just as importantly, a financial expert can help you determine how to keep as much of your new wealth as is allowed.

There can be unexpected costs to sudden upswings in your financial picture.  For instance, people who had health insurance thanks to a stipend from the Marketplace or they received benefits such as housing allowances, student loans, scholarships or government benefits may be surprised to suddenly have to deal with complications due to those benefits.  Those areas may not be covered adequately by software or financial apps.

Some experts suggest that the next step is to deposit the amount into an insured bank account.  The point here is to put it somewhere safe.  Bank accounts won’t provide much earning during this time but you are trying to give yourself a little breathing room.  Even if you have won the lottery, you’d probably want to just get over the all-over tingly feeling before trying to make any major monetary decision (such as quitting your job or buying a house in the Bahamas).  How much more important will it be to get over your grief or sense of loss if the money comes instead from an inheritance, insurance plan or severance package?  Taking time to deal with your emotions first can prevent you from making mistakes that will cost you money in the form of higher taxes or costly mistakes.

After a reasonable cooling off period and a good solid financial plan, you’ll likely need to pay off debt, establish an emergency fund and if you aren’t already retired, fully fund your retirement account.  Be careful of blindly following someone else’s lead.  That expert you hired should be able to explain your plan to you in a way that you can understand before you ever sign off on anything.

Finally, if you received money from an inheritance or as a result of a life insurance policy, consider using the money to honor the memory of the person who left you the money.

However you receive a windfall, if you receive a substantial amount of money that causes you to take a figurative breath, start off by taking time to think about your priorities and hire someone to help you achieve those the right way.


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