Think of it as a problem we would all like to have. Still, consider it a potential problem.
After all, you need a plan to manage your hard-earned money wisely. The same is true when riches seem to appear overnight.
Sudden wealth can take many forms. A lump sum annuity, a sizable inheritance, legal damages in a lawsuit, and the sale of a business can result in riches that can transform the lives of the recipients—for better or worse. That’s because huge amounts of money come with a series of decisions, each with the potential to waste or invest the money, increase or decrease happiness, and strengthen or torpedo close relationships.
“I find that the initial phase is very stressful. It’s hard for your mind and body to absorb the change,” says Susan K. Bradley, a Palm Beach, Fla.-based financial planner and founder of the Sudden Wealth Institute, which trains financial advisors to guide clients at work through all aspects of to support financial planning. a stroke of luck.
Working through all of the issues that come with sudden wealth takes time — typically three to five years — before those lucky enough to feel more grounded, Ms Bradley has found.
While working at the institute, Ms. Bradley met a woman who once sold shoes in a department store before inheriting a multimillion-dollar fortune. Coping with her new lifestyle was just a challenge. Other family members — and heirs heir presumptively — received notional inheritances, and the heiress struggled to deal with her anger and resentment. “It took her three years to build a new life and feel like she fit in the world,” says Ms. Bradley.
Two key components
Two components are important to managing a multimillion-dollar windfall, she says. The first is a confidant — typically a trusted friend or family member — who becomes a sounding board that helps flesh out any ideas and opportunities that come with newfound money. Ms. Bradley knows of a Catholic nun, a teacher who won a lottery jackpot and confided in the school guard who was a good friend.
The second key is a team of advisors who can review the client’s existing finances, such as: B. Mortgage and credit card debt, college savings plans, and charitable giving. In the longer term, advisors can help identify investment opportunities, create an estate plan, develop tax strategies, and secure appropriate insurance coverage.
Ms Bradley also suggests that lucky break recipients consider a psychologist, who can help with the emotional aspects of sudden wealth, as she says it “can mess with your head”.
The advisors would work together like a board of directors to track and manage the windfall recipient’s finances, Ms Bradley says. Together they can fend off predators – friends or family members aggressively seeking handouts. Financial accounting should be transparent to all board members and create a system of checks and balances that could uncover theft or mismanagement.
Recipients should carefully research potential advisors when assembling the team, as not all professionals are honest. Case in point: In July, a New York attorney calling himself “the lottery attorney” was found guilty of wire fraud and money laundering in scams that bilked major lottery winners out of more than $100 million.
This advisory team is structured similarly to a family office, which is a private wealth management firm serving multiple generations of a very wealthy family. At Summit Trail Advisors, a Chicago-based family office, about 20% of clients are entertainers or professional athletes, many of whom come from humble backgrounds, says Peter Lee, founding partner.
“My biggest advice is to do a little bit of nothing,” he says. “Just because you can do a lot of extra things doesn’t mean you should do it. What does “do nothing” mean? Finding a safe, intelligent way to store the capital, typically in “conservation” investments, such as B. Municipal Bonds.
Many professional athletes “go from living in a dorm room with five roommates to signing a $50 million contract,” he says. Their impulse is to immediately buy houses or give away huge sums of money to family members, coaches and mentors who have helped them succeed. .
Instead, advisors at the firm find smart ways for their clients to help others. Mr. Lee has a client who signed a huge contract in the NBA and wanted to give his five brothers opportunities instead of cash. The company devised a strategy for the player to fund businesses for the brothers to run, creating their own income streams.
Help the customer “have an open, transparent dialogue about what is fair and what works. Then come up with a plan,” says Mr. Lee. “If the game plan is missing, everyone drinks from the same bowl. There is no government.”
A little stab
Boulevard Family Wealth, a Beverly Hills, California family office, has worked with a number of clients who have received millions of dollars in inheritance or proceeds from the sale of a business. “We try to be open and honest, even if it hurts a little,” says Matt Celenza, the company’s managing partner. For example, if a customer wants to buy an expensive jet, their company will examine various options, including fractional ownership. and leasing aircraft instead of outright purchase. The same applies to real estate purchases and other major expenses.
The goal, Mr. Celenza, is to protect and enhance assets that will benefit both current and future generations. That is not always easy. His firm created a portfolio for a client designed to generate a steady stream of income. But the client loved tapping into his holdings to make private investments on the side.
“It affected his liquidity and would soon affect his ability to withdraw without touching his capital,” says Mr. Celenza. The company’s consultants provided the client with long-term forecasts based on their current spending and helped them realize that the risks were not practical. “We say very loudly what is right and what is wrong.”
money and happiness
However, dealing with a sudden stroke of luck isn’t just about making sure there’s enough money. It’s also about making sure the money is used to make the recipient happy. Otherwise, it’s just money for money’s sake.
Over the long term, how people spend their windfall has the biggest impact on their overall happiness, according to a 2019 study. The authors, Israeli behavioral economics academics, developed a model showing the short- and long-term effects on recipients’ happiness, which fluctuate over time. In general, winners who quit their jobs and engaged in passive leisure activities were less happy than winners who devoted their wealth to social pursuits and other activities they enjoyed, such as travel, hobbies, and volunteering, the authors found.
The notion that many lottery winners end up broke and homeless is largely a myth, says Robert Östling, an economics professor at the Stockholm School of Economics. He was part of a team looking at the long-term effects of winning the lottery on mental well-being. The study, published in 2020, analyzed the results of a Swedish government survey that included responses from 4,800 people who had won a lottery five or more years previously.
The research found that the long-term effect of winning the lottery on luck was too small to detect. says Ostling. But there was a slight improvement in overall life satisfaction. “It’s not particularly surprising because richer people tend to be more satisfied with life,” he says.
The purpose and methodology of each study varied, but both essentially attempt to answer the question: Can money buy happiness?
“Compared to other life events, money contributes little to life satisfaction and happiness,” says Dr. eastling. “It’s kind of instinctive that everyone wants to get more money. But people overestimate the effect on their happiness.”