Just how do you go about investing a windfall? The answer is prudently, with proper planning.
For most of us, a financial windfall is something we dream of. For the lucky few, it becomes a reality. This financial windfall could be from the lottery. Or it could be from an inheritance or stock options; from a maturing life policy or retirement lump sum; or from selling your business.
That sudden windfall can bring real elation but can also cause confusion and stress. It can be quite an emotional time. Some people feel a sense of guilt and want to give away large sums immediately. Others go on a spending spree and blow most of their windfall before they have a chance to think through their options.
So what should you with your windfall? The best approach is to take your time. Pay the lump sum into a bank account and wait, while the news properly sinks in. Then weigh up all your options. By all means consider gifts and frivolous ideas and whims, such as the dream house or the Lamborghini but do take the time to think. After your initial elation subsides, you need to take a hard nosed look at some important issues.
For example, some people think about giving up work. That's fine, if the sums stack up. If, say, you win, or come into, ￡1 million at the age of 30, you've probably got a good 50 years left to live. Taking that sum on a cash basis for ballpark planning purposes, this would leave you with ￡20,000 a year for life to live off. That's OK but not going to fund a lavish lifestyle. Then take inflation into account, say at a conservative average of 2% per year, and by the time you reach 65, your ￡20,000 will be worth half what it is today. And you'll still have 15 years to go!
So you would need to think carefully about the sort of investments you make at the outset, to optimise your returns to fund the lifestyle you want. And you may still need to work - or perhaps create a new business venture of your own!
Of course, if you come into ￡1 million at the age of 60 or 70, it's a somewhat different picture.
Whatever, you need to take stock of your financial situation. Use this initial period to think about your financial future and your financial objectives. What do you want to achieve with the money? What sort of lifestyle do you want? How much can you spend each year? What's the best way to invest the money to achieve your objectives - cash, property, equities? Are there gaps in your insurance coverage? Do you need estate or inheritance tax planning?
If you have consumer debts, - mortgage, loans, overdraft, credit cards - in most cases it probably makes sense to consider clearing them first and then to look at what to do with your net lump sum.
As you can appreciate, it is crucial that you get expert financial advice, to help you with your financial planning process. The insight and experience of a good financial adviser, plus tax and legal experts, can help you make the most of your new opportunity. They can show you how long your windfall might last, based on projected investment returns and withdrawal rates. They can also explain all the various investment options, so you can select those that match your objectives, timescales and attitude to risk. From there, they can help you structure the appropriate asset allocation strategy for your investment portfolio.
Your financial adviser can also help you with other financial needs, such as life insurance and long-term care. Whatever your windfall, life insurance cover may be needed to help meet your family's ongoing needs as well as help pay inheritance tax expenses should you die. And an extended stay in a hospital or nursing home can seriously eat into your assets. A long-term care policy may help cover the costs.
A financial windfall could also raise the need for inheritance tax planning, whilst it will be important to make sure at this stage that you make a will. If you have one already, make sure that it is updated.
So all in all, if you come into a financial windfall, don't go bananas! Take your time before deciding what to do with it - and talk to professional financial advisers as well as your family.
Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. To find out more on how to invest a windfall, please go to http://www.kelland-gloucester.com/how-to-invest-a-windfall.asp.
Further information about Kellands Gloucester and its services can be found at http://www.kelland-gloucester.com/
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