How to Handle a Windfall

by Michael on Jun 3, 2013 · 12 comments

Photo of Dollars in Hand

A couple of weeks ago, someone won a nearly $600M jackpot — though it was “only” $380M if they took the lump sum cash option.

And then, a few days later, the news broke that Yahoo! was buying Tumblr for cool $1.1B, making their founder fantastically wealthy.

Time and again, you’ll see stories about fortunate folks who receive a major windfall. Maybe not hundreds of millions of dollars, but a life-changing sum just the same. Sadly, many of these same folks go broke almost as quickly as they made it big.

With that in mind, I’d like to spend a bit of time talking about how to handle a sudden windfall. And no, I won’t be dreaming up a hypothetical list of thing that you should do if/when you receive a windfall. Instead, I’ll talk about the things that we did do when it happened to us.

For context, my wife and I sold a small business venture a few years back. This was something that I had built alongside my full-time job. It ultimately grew to the point where we couldn’t manage (or take full advantage of) it ourselves, so we started looking for an exit opportunity.

No, we didn’t pocket hundreds of millions of dollars. But still, it was a rather large payday, at least by my standards. So how did we react?

  • We took our time. We parked the bulk of the money in CDs and gave ourselves some time to digest everything that had just transpired.
  • We kept our mouths shut. We didn’t advertise the fact that we had just scored a sizable payday. In fact, to this day, we haven’t said much of anything to anyone.
  • We paid a bunch of taxes. This is a key point. Don’t forget about possible tax obligations. An otherwise large number could be a good bit smaller by the time you pay the taxman at the end of the year.
  • We paid off our debt. We’ve never carried any consumer debt, but we did have a mortgage. We had previously been working to pay it off early, so we took this as an opportunity to knock out the balance in one shot.
  • We re-considered our need to take risk. When the dust settled, we re-evaluated our investment goals and deciding to adopt a less risky allocation. It wasn’t a huge change, but it was a change all the same. In the end, we went from 70/30 stocks vs. bonds to a 60/40 allocation.
  • We invested the money. Once we had re-worked our target allocation, we put the money to work. And we did so in the same boring, vanilla investments that we’d been using all along (see Our Investment Portfolio for details).
  • I kept working. Even though I may have been able to quit my job, I didn’t. I like what I do and we weren’t interested in rolling the dice with four kids still at home and their college costs, etc. still in our future.
  • We’ve continued to save like mad. Since I still have a full-time income, but we no longer have mortgage payments, we’ve been able to really ratchet up our ongoing savings. That includes the funding of all possible tax-advantaged investment accounts that we can get our hands on.
  • We take time to enjoy ourselves. All of this being said, yes, we do take a good bit of time out to enjoy ourselves. Our recent trip to Disney World is a case in point. I’m also a sucker for time at the beach. :-)

I think there are some important lessons here. For starters, don’t rush into anything. Act slowly and deliberately. Moreover, if you don’t advertise your situation, you won’t end up being pressured to take advantage of “opportunities” that are, more often than not, better left alone.

Ultimately, it’s important to do what’s right for you. In our case, we decided that it was best to pay off our mortgage and (slightly) ratchet back our risk profile. But we saw no need to make our investing life any more complex since the portfolio that we’ve constructed works quite well under a wide variety of circumstances.

Oh, and while you should feel free to enjoy yourself, take great care not to get overextended. As tempting as it might be to buy a lake place or a condo at the beach (or whatever), I much prefer to rent our fun. Let someone else deal with the maintenance and upkeep while you maintain flexibility.

There are certainly people out there who will disagree with aspects of the above, especially with respect to our decision to pay off the mortgage early. That’s fine. I fully understand the arguments to the contrary, and I can honestly say that we haven’t regretted our decisions one bit.

As an asideā€¦ Yes, I realize that we were in a somewhat unique situation in that we already had a plan in place. Many people don’t. To people in that situation, I would say: take your time, keep quiet about your circumstances, and educate yourself.

Everything else can wait.

Speaking of education… If you’d like a crash course in personal finance with an eye toward investing, I would suggest starting with the following three books. And I would recommend reading them in this order:

The Boglehead’s Guide to Investing is another great choice. There are, of course, many other excellent books out there (and some real stinkers). But these books will provide you with a solid foundation in terms of both mindset and mechanics.


1 Lion June 3, 2013 at 1:46 pm

Very good advice for anyone who gets a windfall.

I especially like the fact that it didn’t change you — you kept working, your lifestyle didn’t explode, etc. So many people who get a big sum seem to fall apart in every way: financially, emotionally, you name it…

2 Chris @ Awesome Financial Future June 3, 2013 at 2:38 pm

Awesome article! I especially like the very first point in your strategy – PARK that money for a while! A “cooling off period” will let the right brain’s immediate gratification excitement die down, and give the left brain’s more rational leanings time to take root. Right brains are famous for their impulsiveness – but not for their endurance.

3 Jon @ MoneySmartGuides June 3, 2013 at 7:31 pm

Excellent tips! I always stress to do absolutely nothing with the money for a few weeks. It can be overwhelming when you get it and you’ll have all these plans for it. But by waiting, you’ll realize that many of your plans are wants and not needs, saving yourself money in the end.

4 Kurt @ Money Counselor June 3, 2013 at 10:05 pm

Thanks for these; I look forward to the opportunity to put them to use! Give us a hint please as to the nature of the venture?

5 Martin June 4, 2013 at 12:58 am

Excellent write up and list of what to do. I have it lined up as well. If it ever happen and I win a lottery (which will never happen, because I do not buy tickets) I already know what to do. As you say, I would continue working, pay off the debt, buy a bigger house, and invest the rest into dividend paying stocks and start spending around 70% of the dividends only and reinvest the rest. The principal will be untouchable.

6 Little House June 4, 2013 at 9:43 am

I don’t foresee a windfall in my future, but every now and then, then the lottery jackpot gets super large, I buy a ticket. Mr. LH and I discuss how if we did ever win (and I know we won’t) we’d hire a financial consultant and not tell anyone! I think having time to think things through, having a plan in place, and being quiet about the situation is a great strategy. Congrats on your windfall.

7 Midlife Finance June 4, 2013 at 12:08 pm

So you’re not telling us how much money you make? Man, what a let down. :)
Great tips though. I’ll keep it in mind when we win the lotto.
Waiting and keeping quiet sounds especially important to me.

8 eliza June 14, 2013 at 10:55 am

What do you do when the windfall is accompanied by tragedy. My darling husband of 27 years lost his battle with leukema, living me a widow at 50!! yuck. Now not only am I having to deal with my grief, my two sons grief, I find myself with a couple of million dollars and I’m gripped with fear that I’m going to do the wrong thing and blow it.
I am still working and I did take 1 large vacation mainly because we couldn’t bear the thought of staying in the house during the holidays so we went to Europe.
How do I not end up as one of those people who are broke in a few years.

9 evan June 14, 2013 at 11:45 am

Great article.

Eliza, I am sorry for your loss. My father died recently and watching my mother adjust to her new life has been tough. Having left her financially sound is however a huge relief.

Of note, I have life insurance so that my wife is not obligated to work for at least a few years to make the readjustments she may need in the event of my death.

As for your money situation, some time spent not working your usual job could be assigned to insuring that your money is working for you (and it doesn’t have to be that much time). Depending on any debt repayment, your lifestyle and where you live it may be possible to live off the income stream from your ‘windfall’ and preserve the principal.

10 eliza June 15, 2013 at 8:11 am

Thanks Evan,
It is a large adjustment. My husband and I also had proper insurance (although not sure if we were smart or simply lucky) and I’m extremely grateful. I can’t imagine going through this emotional upheaval and having to deal with financial situations. I think I’ve gone back to work more for some thing to do, my son’s are in college (one out of state) so I’m also a bit of an empty nester. I did pay off my mortgage and put aside 100K in a cd to pay for my son’s college tuition.

a bit of the money I can’t touch 500K is from my husbands 401K and retirement and I inherited a annuity that I don’t think I can touch until I’m 59 1/2.

I admit unfortunately I was one of those “housewives” that let the other half handle the finances.

***sighs***

11 evan June 17, 2013 at 1:02 am

Eliza,

Paying off a mortgage and putting money aside are a sign you are taking smart sensible steps. I know you will figure it out. My father was a Financial Advisor who quipped the only people who worry about money are those who have it – so your fear of ‘doing the wrong thing and blowing it’ is probably not only normal, it likely means you’ll make mindful decisions with the money.

One comment. Just make sure the 401k monies are appropriately invested for your age. Some company plans are the same allocation for every employee (Profit Sharing Plans can be like this) or your husband may have invested a decade/s earlier in an appropriate aggressive allocation of investments, but which is now inappropriate for your later years. Look for a bread-and-butter ‘Target Date’ fund which becomes more and more conservative the older you get- without having to make the adjustments yourself. They don’t get a lot of love, probably because they are boring and simple- but they are truly a set and forget fund- and cheap. And more complexity doesn’t guarantee higher returns.

This article came up in my feed the day I read your reply, and while I have no idea if it is appropriate for you, one of the piece’s of advice was: ‘everything happens for a reason’ – and it just seemed timely, so here it is :)

http://www.positivelypositive.com/2013/06/15/how-to-start-over-when-your-life-feels-shattered/

12 Christine @ ThePursuitofGreen July 1, 2013 at 12:28 am

Very level-headed approach to handling a windfall! That’s awesome that you and your wife were able to stay grounded, keep focused on your goals, and life live normally. It must have been hard to keep mum about it also. I know if I ever came across a situation like that, I would have to not tell almost everyone. I would get miscellaneous, undesirable family members knocking on my door at all hours.

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