Mega Millions fever is here. A record jackpot of $1.6 billion is waiting for some lucky gambler on Tuesday’s Mega Millions lottery drawing.
There’s nothing like the feeling of getting an unexpected sum of money. Of course, every coin has two sides and, typically, the greater the amount you receive, the greater your stress. In fact, there is even a stress-related disorder called Sudden Wealth Syndrome. That pressure can lead the “recently rich” to make decisions that ultimately threaten their good fortune and may leave them worse off than before they received their windfall. We’ve all heard stories about the lottery winners who went broke or the former professional athletes or entertainers who struggle to pay rent.
Whether you’ve just signed a multi-million dollar contract, won the lottery, or inherited property from a wealthy relative, here are some tips that will help you keep–and grow–your wealth responsibly.
1. Count the money. Take the time to add up the money for yourself. Sit down and carefully read every piece of paper associated with the windfall. There will be lots of legal gobbledegook and fine print. Read through it all. Highlight areas you don’t understand. Use the Internet to research terms and entire phrases. By doing this homework, you will be better prepared for the next step.
2. Assemble your team of professionals. You can start your search for competent professionals in a number of places, including asking friends for referrals or asking other professionals like your accountant or tax preparer–or even family members. However, you should vet all of these individuals by understanding their professional and disciplinary backgrounds, get to know something about their practice (i.e. wealth and complexity of current clients) and ask for references to similar clients or cases they have dealt with. Next, you must check their background. There is no reason to leave out this important step since it is free and easy. Your state bar association can provide disciplinary information on attorneys, the state board of accountancy can provide information on accountants, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) can offer any disciplinary information on investment professionals.
You can also search the professional’s name on your state’s financial and insurance regulator’s website. Combine this with research on the websites of their professional organization like the CFP Board for financial planners and the AICPA for CPAs where you can learn about violations of each organizations standards of conduct. Also, research their name and corporate identifier at the county clerk’s website to learn about liens, foreclosures or judgments. Last but not least, a Google (or other search engine) search of their name and business name and name of partners can help give you a picture of this person as a professional. Be sure to review any papers you sign with accountants, and be very clear on fees. It’s best that everyone be paid on a project or hourly rate in the initial stages when plans are being crafted. If someone tells you the work is free, you can be sure that it is not free, and that they are getting paid some other way which they are not disclosing.
3. Develop a comprehensive financial and life plan. Many organizations talk about their ability to do this. They show nice pictures of couples walking in the sand or smiling in a hammock. It certainly sets the right tone for the conversation. Despite this, their plans may be cookie-cutter solutions. In the end, some standardization is good. Years of research has taught the financial industry important lessons about investing, for example, and those lessons can yield low-cost, highly efficient portfolios that meet an investor’s risk tolerance and long term needs. However, don’t forget that your needs come first. To formulate a your plan, you will need to be clear on the amount of income you would like but also the type of life you would like. You’ll need to consult your financial team to discuss issues such as asset protection, trusts, life insurance and other topics of estate planning. The American College of Trusts and Estates Council (ACTEC) can be a great resource for competent counsel in these areas.
4. Be very careful of friends and family. Unfortunately, your new wealth may attract new friends and estranged family members popping out of nowhere. Athletes and lottery winners experience this frequently. In fact, it’s quite common for advisors of professional athletes to put the athlete on a salary and advise the athlete to direct requests for money to the advisor. This can be a good idea and it puts some distance between you and unscrupulous friends and relatives. Also, depending on the amount of your new wealth, you may find yourself exposed to frivolous lawsuits and threats.
5. Don’t make big expenditures until you are comfortable with your new financial position. Don’t get sucked into the exaggerated scale of your financial windfall. Take care of taxes on your new money, pay down debts, take a small vacation but don’t make too many changes at once. Consult with your professional team. If the amount you have received is substantial relative to your prior situation (i.e. invested at 3% per year the annual return covers your dream standard of living and then some), take the time to consider your good fortune and your position as a steward of the wealth. Be mindful of your responsibility to pass some wealth to the next generation, and give to charity.
Written by: Robert J. Gordon, MBA, CFP, AIFA, Senior Financial Adviser with Investor Solutions in Miami, Florida