How to Successfully Manage a Major Financial Windfall

Despite sounding like a wonderful benefit to most people, the reality is that a major financial windfall can produce significant issues and challenges that could impact your emotional health, your family, your vulnerability, and your financial success.

Start by learning some of the potential pitfalls of receiving a windfall. Once you are aware of the susceptibilities and consequences, follow up with a plan that can ensure the outcome is uncomplicated, satisfying, and useful for you and your loved ones. Importantly, lean on the guidance of professional financial advisors who have experience with the complexities of wealth management and who will act in your best interest.

What is a major financial windfall?

What is classified as a major financial windfall really depends on your unique financial situation. It could be $500,000, or $5 million, or much more — one person won a $2.04 billion Powerball jackpot in November 2022.¹ A major windfall is usually an unexpected amount that’s large enough to significantly change your current financial situation. This sudden wealth could come from:

• A large inheritance
• A big payout from employer stock compensation
• The sale of your company
• The sale of real estate property
• A legal settlement due to divorce or injury
• A mega contract as a professional athlete or artist
• A lottery win

Five pitfalls of sudden wealth

Preserve your newfound wealth by avoiding traps and managing challenges like the ones below.

1. The emotional toll: Your financial windfall marks a major life transition, and a change to your state of being can have a negative impact on your health. If you’re a business owner, consider how it might feel to sell a business that you’ve worked hard to build — there may be a loss of identity or sense of purpose after you sell the business. If you received an inheritance, you’ve not only lost a loved one, but you could feel conflicted between wanting to use the money to enhance your life versus honoring your loved one. If you received a legal settlement from divorce or injury, you may have guilt or self-doubt about rewarding yourself by improving your lifestyle. Financial decisions often intertwine with emotions, so it’s crucial to be aware and to understand what is motivating you.
2. Giving away too much money: If others know of your sudden wealth, they may approach and pressure you for money, whether for charity donations, a personal loan, or funds to start a new business. Be aware that loans or business investments to friends and family may not get repaid. And if you give away too much of your money due to emotional attachments, you may erode your wealth faster than anticipated. This includes estate planning decisions, which could trigger major tax implications or excessive legal fees for loved ones.
3. Nonchalant or extravagant spending: Windfall money may feel like it is burning a hole in your pocket. It’s okay to indulge a bit but, if you do, avoid permanently increasing your cost of living. Examples include leasing or buying a high-end car or purchasing a vacation property. If the money needs to last you a long time, thoughtless and excessive spending without keeping long-term goals in mind can jeopardize your financial future. Take control of your finances by setting a financial plan and tracking your spending diligently.
4. Choosing the wrong advisors: There likely will be a lot of people seeking to help you manage your investments and other financial planning needs, whether they’re professionals, or family, or friends. It’s also likely that many of them won’t have the proper experience, expertise, and skills, even your well-meaning loved ones. For instance, there are tax implications to consider with a major financial windfall and someone who isn’t a tax attorney may not know how to interpret the complex IRS tax codes. Trusting the wrong people can cause irreparable damage to your financial health.
5. Potential lawsuits: Your newfound wealth might make you a magnet for unwarranted lawsuits. Up until now, you may not have needed the appropriate and specific insurance that protects wealth, including umbrella liability coverage. Without the proper legal protection and insurance solutions, the windfall’s consequences could end up ruining your financial security. The Powerball winner from 2022, mentioned in the beginning of this article, was sued by a man who claimed the winning ticket was stolen from him.

Realizing the potential

Below are four steps for realizing the positive impact your windfall may potentially provide.

1. Take your time. Catch your breath and don’t make any unnecessary or rushed decisions. There is plenty of time to evaluate all your options. Receiving an unexpected lump sum of money brings with it a wide range of issues and emotions, so it’s best to slow down and work through them. Ensure you’re thinking clearly about the windfall’s impact and your next steps. The $2.04 Powerball winner didn’t claim the winnings until three months after the drawing.
2. Envision your future. First, set a timeframe for developing a clear, long-term vision of what you want for yourself, your family, and others in this world. This period can vary, but 3-6 months is a good starting point. This timeframe will allow the initial emotions attached to the windfall to pass and will allow you to develop a sustainable long-term plan. Create a list of the things you would like the money to accomplish and assign each dollar of the windfall to an item. This way, when new goals, ideas, or investment opportunities come up, you will have a framework for evaluating it. To say ‘yes’ to this, what do I now have to say ‘no’ to?
3. Build your team of trusted financial professionals. Because your financial situation has changed significantly, it’s important that you put together a team of advisors that can help you plan and execute your vision for the future. Your team should include a CPA or tax attorney, wealth advisor, estate planning attorney, and insurance professional. Be sure you get the right financial professionals, preferably fiduciaries with expertise advising clients on the nuances of windfalls. It’s always a good idea to get referrals from people you trust. Take your time finding the best fit with your values and goals. Even state lotteries recommend winners consult with professional advisors before claiming their prize. Learn what to ask potential financial advisors in an interview.
4. Put your plan into action. Once you have your professional team in place, collaborate with them to develop a plan that is realistic in terms of how much you will be able to spend. Prepare a clear view of your current assets, investments, and liabilities to share with your trusted advisors. Your financial plan should also reflect your values and goals, which may include helping your loved ones or others. Once your plan is in place, continue to be self-aware of your overall situation — have discipline with your life-long spending habits and rely on your advisors to help with making intelligent and informed decisions.

Receiving a major financial windfall can elevate your family’s level of financial security and provide you with opportunities you never thought possible. You may even be able to make your dreams come true. Recent research has concluded that sudden wealth from winning the lottery produces a sustainable increase in overall life satisfaction for many years.² To help set yourself up for financial success and life satisfaction, avoid the pitfalls and focus on maximizing the potential lifelong benefits of your sudden wealth.

At Mercer Advisors, we want to amplify and simplify your life with integrated expertise in financial planning, investment management, tax, estate, insurance, and more, all managed by a single team.

If you are not a client of Mercer Advisors and want to know more about how to handle a major financial windfall, and how it should fit into a comprehensive wealth management plan, let’s talk.

1.“$2.04B Powerball winner bought $25M Hollywood dream home and another in his hometown,” USA Today, Aug. 4, 2023.

2.“Debunking The Myth: The Surprising Truth About Lottery Winners and Life Satisfaction,” Forbes, Aug. 29, 2023.