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How to Handle a Windfall

There's just one sure rule of thumb: If you spend it too fast, it will eventually disappear.

Waiting in line to pay for a cup of coffee and a bagel, the guy in front of me said, "Give me ten bucks worth of quick picks for Wednesday -- cash."

Hey, you never know! It only takes a dollar and a dream, and you could actually win the lottery. Or maybe you have the stuff it takes to walk away with the big prize from TV's

Who Wants to be a Millionaire?

And there are many other ways that unexpected good fortune, otherwise known as a windfall, could arrive:

  • An unexpected inheritance.
  • An unexpected gift.
  • Holding the lucky numbers and actually winning the lottery.
  • That one-armed bandit in Vegas actually pays off.
  • An investment in an initial public offering pays off.
  • You work for a company that has a hot IPO and your stock options pay off.
  • An unexpected bonus.
  • A personal-injury settlement.

Enough already! So, let's say you get a windfall -- what next? Now we get into the amorphous realm of human behavior. What to do with it?

In the last few days, I've asked at least 15 people what they would do with a million-dollar windfall. Here are some of their spontaneous answers:

  • "I'd buy a new house and two cars, pay off all my debts and hopefully have half of it to invest."
  • "I would take a trip around the world and invest the rest."
  • "Blow it, baby, on wine, women and song!"
  • "I would help my mother, who is sick, with her bills."
  • "Buy a new pair of skis, go to Aspen for a week and walk around in my new fur and skin-tight Bogner outfit."
  • "Buy a new car and add the rest to my retirement portfolio."

Try asking this question at a cocktail party, and the gabfest that follows will really make the time pass quickly.

The most obvious rule of thumb I've learned is this: What someone does with a windfall totally depends on who they are. There are few rights or wrongs. If a guy is 90, has a terminal disease and wants to spend his money traveling around the world, am I going to suggest otherwise? His relatives with an eye toward an inheritance might, but not me. There isn't necessarily any moral right or wrong when it comes to what to do with a windfall. As a financial planner, it's not my place to make those kinds of value judgments.

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That said, I often discuss issues with clients that relate to immediate gratification, as well as those that relate to long-term survival at an acceptable economic level. This happens almost every day, but the discussion takes on a different emotional tone when suddenly there is a lot more money.

For the record, I've worked with a number of "windfall" clients. These include two personal-injury situations (involving $12 million and $19 million settlements), several situations involving significant amounts of life insurance, as well as executives with large bonuses and stock options, some worth millions. And more recently, a 24-year-old client received about $2 million for a Web site he created. I've consulted with two couples who won the New York Lottery (each won about $2 million). Of course, there have been several intergenerational inheritances.

I suggest that people who receive a windfall do two things. First, don't tell anybody, if it's not already public knowledge. Second, put most of the money into a good money-market fund until the emotional "charge" passes.

If the windfall is public knowledge, I suggest they hire a strong but diplomatic person to handle all the pleas for financial help they'll be getting. Pleas will come from relatives, friends and charities. If they don't get help on this, it could screw up their lives for a long time. When they get a call asking for money, they should simply say, "Oh, there's no way we could handle all the money, so it's in trust with so and so. Feel free to call them, if you like."

Having taken these steps, there should be time to put together a good plan for the money. This plan should address all short- and long-term needs. You'll need to determine whether there is any kind of tax due on your windfall. (The "relative" that can cause you the most problems will be Uncle Sam, if you don't take care of him first.)

The next issue is paying off all "destructive" debt. This includes credit cards and other consumer debt. It may or may not be appropriate to pay off a mortgage. An effective plan will include cash flow planning, tax planning, an investment strategy, a retirement strategy, and estate and insurance issues.

Whatever amount you end up investing, keep the following chart in mind. It may help answer the question, "How long will my money last?" The answer depends on two things: The percentage of your investments that you spend each year, and the return you receive on your investments, including dividends, interest and capital gains.

This is obviously oversimplified, because it doesn't take into account inflation. The point is, a wisely managed windfall could help assure that you'll never run out of money.

Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at