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Money, despite all the opportunities it offers, can be a huge source of stress and anxiety if you are not used to having it.
Suddenly finding wealth, whether through inheritance, a stroke of luck, or winning the lottery, can present serious emotional and financial challenges for people who haven’t had a lot of money in their lives.
“Are you going to keep working? Buy a new house, private school for the kids?” said Barry Glassman, a board-certified financial planner and founder and president of Glassman Wealth Services in Vienna, Virginia. “Sudden wealth offers greater choices, but can create a lot of problems and anxiety because of the sheer number of decisions to be made.”
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Think of professional athletes. A 2015 survey by the National Bureau of Economic Research found that 15.7% of NFL players had filed for bankruptcy within 12 years of their retirement, even though many of them had made millions of dollars in their careers. According to Sports Illustrated, a staggering 78% of retired football players found themselves in serious financial distress just two years after retiring from football. The stats were only slightly better for pro basketball players.
Not only young athletes who become millionaires overnight are struggling with luck. People who receive large sums of money very often have trouble handling it well. So what should you do if you are the beneficiary of a lucky break?
“Don’t do anything for a good year,” said Sheryl Garrett, a CFP and founder of the Garrett Planning Network in Eureka Springs, Arkansas. “Don’t call a financial advisor and don’t tell people details about it other than talking to a good tax attorney.”
Glassman has the same advice. “Don’t buy anything, don’t make investments, and don’t pay off debts,” he said. “You can make those decisions in a couple of months.
“The only thing you urgently need to do is meet with tax professionals to discuss taxing your fortune and staying compliant in your new circumstances.”
There will of course be many decisions to be made, many of them very happy ones. However, a large sum of money will almost certainly present some emotional challenges for people who are not used to having significant wealth.
Stories about the suffering of lottery winners are true. Big money can change what family and friends expect of you and seriously challenge close relationships.
“When it comes to money, someone in family and friends is going to have problems,” Garrett said. “It could be the recipient of the good fortune, or it could be a brother-in-law who feels they deserve some of it.
“People get greedy,” she added.
We have a tendency to believe that large sums of money will last.
Sheryl Garret
Founder of the Garrett Planning Network
Garrett also warns people to beware of the illusion of large numbers. One situation she sees frequently involves clients being offered a buyout of their defined benefit pensions. People who are offered a payout of $400,000 versus a monthly payment of $2,500 for the rest of their life typically take the lump sum, even when the monthly payment makes more financial sense.
“We have a tendency to believe that big bucks will go a long way,” Garrett said. “There is so much motivation to take the big sum and so many who want to part with that money.”
Even people who experience much greater fortunes face challenges in dealing with them effectively. Glassman has clients who have sold companies for millions, and they too buy things and make investments that eat away at their fortunes over the long term.
“I had a client who made $15 million after selling his company,” he recalled. “He spent $4 million buying real estate and that’s left with $11 million and $100,000 in new annual expenses.”
Not that you shouldn’t buy a house, car, or boat for yourself or someone else if that’s what you really want. The problem with sudden happiness is not spending money too quickly, showering gifts on family and friends, or making bad investments. It doesn’t ensure that your newfound wealth is sustainable. In other words, you need a financial plan.
After “doing nothing” and consulting an accountant, your next step should be to find a good financial advisor to help you manage your wealth and ensure it lasts.
“The challenge is prioritizing what’s important to you,” Glassman said. “Maybe you want to pay off a student loan or buy a house for mom or a motorcycle for yourself.
“It can’t usually be everything,” he added. “A good financial advisor will help you think through those priorities and put the money to work toward your goals.”