George D. Marron, BridgeTower Media Newswires
We have all heard the stories about lottery winners and top sports draft picks who make it big only to lose all of their money and spiral into emotional and financial despair. In reality, sudden wealth affects more people than just lottery winners and athletes. Sudden wealth can impact business owners when they sell and retire (or go public), employees who receive substantial bonuses or stock options, surviving spouses and children, personal injury plaintiffs, divorcees and other successful litigants. The fact is that anyone who receives a substantial windfall can suffer from “Sudden Wealth Syndrome” and needs a plan to avoid it.
Psychologist Stephen Goldbart of the MMC Institute coined the phrase Sudden Wealth Syndrome to describe the psychological issues associated with new or sudden wealth. These symptoms range from increased anxiety and panic attacks, money-related ruminations, ticker shock (cycling anxiety and depression around stock market movements), sleep disorders, irritability, guilt, identity confusion, loss of control and paranoia. When most of us read this list and think about winning the $100 million lottery, signing the juicy sports contract or just selling the business, we are all saying, “Not me, no problem, I could handle it.” But in my experience, sudden wealth is a disruptive force for everyone.
The best way to avoid Sudden Wealth Syndrome is to have a meaningful and executable plan in place that covers the emotional, psychological and financial ramifications of sudden wealth. For example, if you are selling your business and retiring, retirement may present a significant emotional and social vacuum for you. You may have been making a nice living, saving and reinvesting in your business. Your business was your financial plan and occupied at least 50-60 hours of your week. Most of your social and personal relationships were probably tied up in the business.
With the sale, you will have cash and time. Your plan needs to provide an outlet for the intellectual and emotional energy that you formerly poured into your business while also providing the money management and cash flow throughout your retirement to meet your lifetime and estate planning goals.
Let’s say you are newly divorced, a surviving spouse or a surviving beneficiary. Undoubtedly, you are going through traumatic and life altering events. On top of that, if you have not had much investment management and financial planning experience, you are now trying to learn a new, often confusing professional discipline so that you can manage your own life. This is no easy task. It can be overwhelming. You don’t need to go through it alone.
We offer the following advice to you, if you recently received a windfall or have reason to believe that you will receive sudden money.
Take a deep breath and exhale slowly. Repeat this step throughout the process. It helps to clear your mind. Take some time to remember who you are and what is important to you. Keep your money in a safe, secured account (or accounts) for a few weeks (maybe months) in order for you to start planning. Do not make any fast decisions with your money.
Stay true to your values. People may start to treat you differently. You might think that you should live differently. Focus on what is important to you. Your values will help guide you through these challenges.
Build the team. If you do not have one already, you will need a solid team with an accountant, lawyer and a money manager whom you trust. Make sure that these people have your best interest in mind and are required to act as a fiduciary to you. If you feel like you are being pushed into something that you do not understand or want, take a breath and slow down the process. If you do not understand something — ask. If your team isn’t responsive and supportive, make changes.
Build the financial plan. After you build the team, it is time to put your newfound wealth to work. Regardless of how the money came to you, you now need it to be the fuel and the engine that supports your lifetime spending needs and estate planning goals for the next 20, 30, or 40 years. Make sure that your plan addresses disciplined risk management, proper asset allocation, income taxes, includes an update of your estate plan and supports your reasonably budgeted cash flow needs. Your plan should include annual spending needs and provide for regular monthly or quarterly deposits into your bank account for your spending. This “paycheck” should help you to stay on budget. You should review the plan regularly (quarterly in the early stages and at least every 2-3 years once you are in a comfortable routine).
Use your team. When in doubt, repeat step 1 — take a breath — and use your team. If you are unsure of the plan, continue the planning process with your team. If you need to make a substantial withdrawal, consult with the team. If you need someone to help you say, “No” to others, use your team (or at least blame your team for why you have to say, “No”).
Practice stewardship. Ideally, steps 1-5 will position you so that you adapt to the changes brought on by sudden wealth. After working through the initial planning process, you should have the opportunity to develop a longer term plan for what your money means to you and your family. This might include trust planning, developing a family mission statement and including children (at the appropriate age) in money management and philanthropic decision making so that they become acclimated to the process and are not shocked by sudden wealth.
Sudden wealth should be a good problem. However, it can bring significant emotional and psychological issues that can erode the wealth and certainly impact the person. While no plan is foolproof, managing sudden wealth with these six steps should help to reduce the potential negative impact while improving the likelihood of continuing that wealth to the next generation.
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George D. Marron, JD, CFP is vice president for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680.
