While it is highly unlikely you’ll win the lottery, it is quite possible that at some point in retirement you’ll receive an unexpected, significant sum. This can happen when a loved one passes away and leaves you an inheritance, an insurance company sends you a large sum for a settlement or you receive a gift from a family member.
Instead of making immediate plans for the extra money, it’s best to take a careful look at your options and then select what’s best for your situation. During retirement, when there are often limited income opportunities, it is especially important to dedicate time and thought to the windfall before making any plans.
Follow these steps to make good use of an unanticipated windfall in retirement.
1. Understand the amount. If you hear a specific figure attached to your windfall, be careful not to assume that’s exactly what you’ll receive. “Unfortunately, it is common for the recipient of a surprise windfall to underestimate the impact of taxes, fees or fine print,” says Kurt Rossi, CEO of Independent Wealth Management in Wall, New Jersey. Consider talking to a financial planner or advisor to sort through the various taxes and other charges that may be applied to the windfall. Once you know the net amount, you’ll be able to move forward with planning.
[See: 10 Financial Perks of Getting Older.]
2. Consider your current money goals. Before drawing up a wish list, you’ll want to evaluate your current financial outlook. “A good financial first step is to start tackling the goals you had before you had money,” says Misty Lynch, a certified financial planner with John Hancock Financial Services in Boston. If you were struggling to pay bills each month before receiving the windfall, looking at your current budget and seeing how the funds could help alleviate this strain might be a good starting point.
3. Look at your debt. If you are carrying a credit card balance, mortgage, home equity line of credit or any other loan, a windfall can help ease the stress of making ongoing payments. “Free up cash flow by using the money to pay down debt,” says Judith Ward, a senior financial planner at T. Rowe Price in Baltimore. If you’re currently putting $1,000 each month toward a mortgage, and you use the windfall to pay off your home, you’ll be able to put that monthly payment of $1,000 toward something else. You might invest it, spend some of it or set it in a special fund for traveling.
4. Add extra money to your rainy day fund. If you have several months’ worth of living expenses in a separate account, now might be a good time to add to the stash. “Increasing your ‘cash cushion’ may help ease anxiety of market volatility impacting your investments, unforeseen expenses on the horizon or future medical and long-term care costs,” Ward says.
[See: 9 Easy Ways to Save $500 More Per Year for Retirement.]
5. Improve your lifestyle. Whether it’s a fresh coat of paint on your home’s exterior, a new car or a kitchen remodel, setting aside a certain amount to put toward your everyday activities can help boost your overall mood and energy levels. The windfall could even be used toward long-term improvements, such as home modifications, that will allow you to age in place. “It could enable you to relocate to a more age-friendly location or one closer to family,” Ward says. Also consider services such as meal delivery or cleaning to lighten up daily chores.
6. Fund a venture for yourself or others. If you have a long-awaited item on your bucket list, or know someone who does, now may be the right time to cross it off. “Take that once-in-a-lifetime trip with the family,” Ward says. You could also go back to school, take on a hobby or help someone you love start a business.
7. Keep on giving. If you do not need the windfall to pay off debt or help boost your current monthly income, you may decide to pass on a portion of the wealth to a loved one. The annual gift tax exclusion for 2018 is $15,000 per person. A married couple can combine the gift and give $30,000. You might decide to start a college education fund for a grandchild or help a child pay off debt balances from lingering student loans.
[See: 10 Ways to Celebrate Your Retirement.]
8. Don’t overspend. If you find yourself dreaming of luxuries you couldn’t previously afford, such as a second home, a sports car or a new boat, remember to consider ongoing costs before making any purchases. “These things are fine, once the total retirement needs are met well into the future,” says David LaMay, a certified financial planner at Essex Financial in Essex, Connecticut. “However, you have to keep in mind that many of these items will increase expenses going forward and all expenses increase due to inflation over time.” You don’t want to run the risk of spending down a windfall, while simultaneously increasing your annual expenses.
9. Be mindful of others. Word often spreads fast regarding significant sums, and you could find past acquaintances or distant relatives knocking on your door when they hear about your new funds. “There may be people who want to take advantage of you and there is no obligation to say ‘yes’ to every person that asks you for help,” Lynch says. Instead, ask for time to consider requests and talk to a financial advisor before making any decisions.
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What to Do With an Unexpected Windfall in Retirement originally appeared on usnews.com
