Derek Notman |

What to do with a financial windfall

At some point in our lives, we all dream of having more money than we know what to do with.  How many times have you heard people lament about what they would do with their winnings from a windfall like a lotto pay-out or selling their business?

So, here’s a scenario to get the cogs turning.  You’ve just won the lottery or sold your start-up company for a significant profit, what are you to do with all the extra zero’s in your bank account?  A windfall is a welcome addition to anyone’s bank account but does not come without its own set of challenges.  Sure, the money can help alleviate the stress of making ends meet, it also provides a once-in-a-lifetime opportunity to achieve most or all of your long-term financial goals. At the same time, however, sudden wealth also opens the door to a host of financial challenges.

As an experienced financial advisor with the Certified Financial Planner® designation I would like to assist you in understanding how you should use your newfound wealth and ensure you are receiving accurate information and advice.

Basic Strategy for a Financial Windfall

What you do with your newfound wealth is going to depend on your age, assets, financial priorities and most importantly your hopes, dreams & goals.  I would suggest you take a step back and survey the landscape.  Is your windfall enough to change your lifestyle?  Does it replace your income, or do you have a lot of debt that needs to be settled? 

Whether you have bad debts such as credit card and car loans or a home mortgage you will want to first know your current financial situation in detail before making any decisions.  Waiting a couple weeks or months to sort out the best strategy for your new-found wealth is well worth the time taken.  If your windfall is large enough you may be able to never have to work for income again, but make sure you work with a financial professional that can help you test out a variety of scenarios for the future to see what strategies make the most sense for your future.


Have a Safety Net

Just because you may now be able to “self-insure” because of your windfall doesn’t mean you should.  Mitigating your risks by having the correct and right amounts of insurance is typically a much better way to protect yourself while also using the powerful leverage insurance provides.  Insurance you should consider includes life, health, auto, property, liability and long-term care.  Having these safety nets in place will protect your assets and allows you to have more freedom in how you invest the rest of your wealth.


Protecting your personal assets can also be accomplished by setting up a trust, or a Limited Liability Company (LLC), to protect yourself and your home from the threat of legal claims. Your estate plan, of course, should also include a will, trusts for you and your heirs and the designation of a legal guardian to manage your assets in the event of your premature death.  Working with a qualified estate planning attorney is very important to make sure these strategies are set up correctly.


How to Invest a Windfall

With your assets well protected it’s easier to determine how much of your windfall you can potentially safely risk through other investments.

Firstly, determine what kind of return you need to meet your goals. For example, if your goal is to retire at 55 years old, decide how much you’ll need on a yearly basis to maintain your standard of living and multiply that by the number of years you expect to live. These days, most planners tell clients to base their projection on age 95, but I always run it out to age 100 to make sure my clients are going to be OK to an advanced age.

Perhaps you now want to purchase a second home, another business, etc.  Make sure to toss these costs (investments) into the mix.  Its important to set aside cash reserves for living expenses in a liquid, interest-bearing account like municipal bonds, treasuries, and CD’s.¹

Only after taking all this into account can you, with the help of a financial advisor, design a portfolio for your investments that will provide the income you need while minimizing taxes and risk as much as possible.


Setting Up Guaranteed Income

While having your windfall invested in a variety of market-based investments like stocks, bonds, real estate, etc. can definitely make sense, most entrepreneurs I have worked with also want to make sure they have some guarantees2 in place now that they have exited their company.  They still remember all the risk they took to start and scale their company.  They remember the days where they didn’t have two nickels to rub together. 

One strategy that could be part of your overall investment income plan would be to consider adding some guaranteed income to your portfolio.  To help take out some uncertainty moving forward you can use what is called a guaranteed income annuity for part of your windfall.  It converts some of your cash into an income stream that will last as long as you live, regardless of what the markets do.  You can learn more about this strategy in my blog Guaranteed Income for Entrepreneurs.


Be Cautious

Consider yourself very lucky if you’re among the few to be sitting with extra cash from a windfall.  Perhaps more importantly though, consider your financial plan with care.   Don’t make rash decisions, put only disposable assets at risk and remember the goal with any windfall is to take a step back and think about what you want for the future and then establish a foundation of financial plan that helps you get there.

Also, be cautious about who you tell about your new-found wealth.  Sadly, money can change people for the worst so make sure to keep your personal financial situation private and only share it with parties that need to know, like your financial advisor, attorney, accountant, spouse, etc.  There is usually no rush to invest your money so keep a level head and take your time when working with your team of professionals.  If you don’t feel comfortable or understand the strategies being recommended, then say so and don’t implement anything until you feel good about doing so.

I have found that the best planning is done before you have all those extra zero’s in your bank account!  So do your homework and find the right people to help you on your journey.

Thank you for reading!


Derek Notman

¹ CD’s are FDIC insured, whereas fixed annuities are guaranteed by the issuing insurance company. CDs are typically used for short to medium term savings needs, while annuities are typically used for long-term funding needs such as retirement.
2 All guarantees are backed by the claims-paying ability of the issuer.
This is for informational purposes only.