Three Tips to Successfully Manage Sudden Wealth

The recent Mega Millions jackpot was the third largest in U.S. history.

Unless you’ve been living on a deserted island, you’ve probably heard that someone bought the winning ticket for a $1 billion Mega Millions jackpot at a Michigan grocery store in late January. The third largest lottery prize in U.S. history has generated endless talk show discussion on how the winner might handle the winnings. Take the lump sum payment of $739 million (about $530 million after taxes), or the annual payouts instead, starting at $11.3 million after taxes and increasing 5% every year?

A similar conversation takes place thousands of times each year with injured people and their families when considering what to do with the proceeds of a settlement. And like Michigan’s lottery winner, they face many of the same financial, emotional and relationship challenges common to anyone who suddenly comes into a lot of money (albeit with a few less zeroes attached).

First recognize that a big financial change for someone not used to handling money makes them highly vulnerable, says Susan Bradley, founder of the Sudden Money Institute. Friends, family and others with get-rich schemes often come out of the woodwork. Horror stories abound that include bankruptcy, murder, robbery, drug abuse and ruined relationships. Sadly, we’ve heard similar stories after an injury victim receives a big chunk of cash.

The good news is that after the initial shock and disorientation, people can go on to wisely turn a financial windfall into long-term security and happiness. Whether it's winning the lottery or receiving a big inheritance, a bonus, a tax refund or an injury settlement, here are three tips from the experts:

1) Keep the Details Confidential

This may be difficult for either a lottery winner or a settlement recipient, but the fewer people outside of a trusted circle who know the details, the better. Lots of money attracts attention from the news media, friends, family and scammers. Staying under the radar as long as possible will also create breathing space for better decision making. The Michigan lottery winner has yet to come forward publicly.

2) Enlist Trusted Advisors First

Don’t rush to spend money. As Bradley points out, financial disruption can easily overwhelm and impair judgement. Assemble a team of pros to create a long-range financial plan. A settlement consultant in injury cases, along with legal and tax professionals, will help preserve wealth and avoid significant tax consequences. Use these advisors as a buffer for anyone asking for money, protecting both your wallet and your relationships.

3) Prioritize Financial Needs

Work with your advisors to make a list of financial priorities and lock in a plan to cover the short- and long-term essentials of life. Pay off debt first, create a savings account for emergencies and consider hiring a therapist!  Then set aside money for the future – for mortgage or rent payments, long-term health care needs, retirement savings, college tuition and so on. 

Lump Sum vs. Annuity?

Last but certainly not least, let's address the raging debate on lump sum versus annuity/structured annuity. While everyone’s situation is different, the best answer is almost always a combination of the two, which takes advantage of the pros of both and avoids the cons.

Pros for the lump sum option include immediate access to the money (liquidity) and potentially higher return. The cons, especially for those suddenly thrust into managing a large sum of money, start and – all too often – end with the money running out prematurely. Of course, the IRS will take a significant tax bite out of a lump sum payment, or in the case of a personal injury settlement, out of any gains. And even if the money makes it into traditional investments, these involve risk and may see significant losses during volatile markets.

Pros for annuities include more money over time than a lump sum payment. The payments may be taxed at a lower rate in traditional annuities, or in the case of a structured annuity in a personal injury settlement, there are no taxes on earnings or proceeds. Those payments are also guaranteed regardless of market volatility. And there are no ongoing fees or investment charges.

The lack of liquidity, often considered a con when discussing annuities and structured annuities, is actually a strength after sudden wealth. A measured plan of distribution protects recipients from themselves and others while providing adequate liquidity when handled correctly. Earnings, the other oft-cited con directed at annuities, presupposes success in mitigating the market volatility, tax exposure and ongoing fees associated with traditional investments. (Big FYI and topic for upcoming special issue of IN YOUR INTEREST: the interest rate on 30-year treasury bonds is the highest it’s been since before the pandemic.)

Game Time for Your Ringler Consultant

When it involves an injury settlement, your Ringler advisor is very comfortable playing quarterback at this juncture, helping the settlement team decide what assets should go to the structured annuity and what assets should go to outside (non-guaranteed) investments. Ringler consultants have a range of planning tools and solutions unmatched in the structured settlement industry. Together we can help your client successfully overcome the challenges of sudden wealth and achieve the priceless peace of mind that comes with knowing life’s financial milestones are covered.