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Managing a Windfall

Most people have dreamed of winning a lottery or inheriting large sums of money. Unfortunately, the track record of those coming into large windfalls is disappointing. One study found that a third of people who received an inheritance had spent it all within 2 years. 

Over the next decade, millennials are expected to inherit trillions of dollars worldwide. Amounts of inheritances vary widely with the average expected to be between $150,000 and $200,000. And the the timing of inheritances will be later in life as previous generations live into their 90's. 

Windfalls come in  all shapes and forms. Sale of property, settlement of a lawsuit, year-end bonus, the pension payout from a career change are all more likely than a lottery win. No matter how it arrives, here are some ideas to sustain your windfall:

  1. Don't do anything  immediately.   Take some time to reflect on what's important to you now and in the future before making any impulsive purchases. Develop a sound financial plan to address short term and long term goals. 
  2. Get help.  A good financial advisor will help you prioritize how you want to move forward and provide tax-efficient, investment charitable and estate planning strategies.
  3. Pay down or pay off expensive debt.  As you develop a plan, your financial advisor can help you prioritize what debts to pay off and those you may want to leave for now. For instance, it makes sense to pay off credit cards at 28% but you may want to leave your 2.25% mortgage until it renews. Particularly if you can generate 5-6-7% returns with a balanced investment portfolio.
  4. Keep some cash available.  If you've always lived paycheque to paycheque and never had an emergency fund, this is the time to set aside 4-6 months worth of living expenses in a high interest savings account - just in case. 
  5. Bring your retirement plan up to date.   Most Canadians are behind in their retirement savings and, depending on the size of your windfall, this may be the time to address any shortfall. Your financial advisor can help determine how much you need to save to create the retirement income you're looking for. And they can also help you structure the blend of savings - RRSP, TFSA, and Non-Registered investing - for tax advantages now and in retirement. 
  6. Be mindful of taxes.  If your windfall came from sale of a business or property other than your personal residence, there will probably be taxes owing. The same can happen with large severances and pension payouts when not enough taxes are withheld. See your financial advisor or tax professional to set enough aside for the tax man. 
  7.  Support causes most important to you.  Past  lottery winners have described being  targeted by charities and acquaintances they don't  know well.  Prioritize the charities (and people) closest to you, get some advice on how much is affordable and prepare to say "No" to the rest. 
  8.  Take care of yourself.   With all the rest of your plan taken care of, remember to set aside a little to enjoy the moment. It could be a short vacation or starting a new hobby - as long as it isn't the beginning of a spending spree that whittles away your windfall.

Of course, the key to managing any windfall is to  stay grounded with advice from family, friends and professionals you can trust.             No matter how big the amount, history has proven it can all be gone if not managed prudently.