By Lucy Lazarony, Next Avenue
A generous inheritance. A booming investment. A big raise. What should you do with a large sum of unexpected money you discover coming your way? In particular, how should you handle such a windfall when you are aged 50 and up? Surprise! Some of it can be used for fun.
Here are some of the best ways experts recommend to handle a windfall.
1. Don’t make any sudden decisions. Acting too quickly can be the wrong move.
“One client we work with in their mid-50s received a sudden, unsolicited offer for their business. Against our advice, they quickly accepted the offer and were left bored and without purpose for a few years after the sale,” says David Wilson, a Certified Financial Planner and managing partner at Sincerus Advisory, in New York City. “After a series of inward facing assessments and exercises, they found activities, hobbies, a social network and charitable work that gave them the daily purpose and fulfillment that was missing after the business was sold.”
2. Give yourself a break. Take some time to pause and relax.
“When it comes to a large financial windfall, it’s important to recognize that this can be an overwhelmingly stressful and emotional phase of one’s life,” Wilson says. “So, the first step we recommend to people in this situation is to take a little break and relax so that no major financial and life decisions are made early on during what usually is an emotionally tumultuous time.”
So give yourself a little vacation as you ponder your next financial steps.
“A staycation or some time hanging by the pool on a tropical island can help someone who has received a windfall think through what’s important to them and brainstorm ideas on what the next phase of their life could be,” Wilson says. “We highly recommend that people don’t make any large purchases or sudden lifestyle changes during this period.”
3. Think and plan. Consider all the different ways you want to spend the additional money coming into your life.
“Typically, I suggest allocating the wealth into four buckets: debt payoff, major purchases, retirement and fun,” says Chris Diodato, a certified financial planner and founder of WELLth Financial Planning in Palm Beach Gardens, Florida. “Yes, I typically recommend allocating between 5% to 10% of a windfall for ‘fun,’ such as travel and recreation opportunities.”
Don’t go too wild with spending. Your windfall can disappear in no time.
“The worst thing somebody can do with a windfall is increase their recurring lifestyle expenses,” Diodato says. “In other words, if a family makes $100,000 per year and gets a $250,000 inheritance, they should maintain their recurring lifestyle expenses as if they were still only making $100,000 per year to prevent drawing down on their inheritance.”
4. Pay down high-interest debt. A great use of a hefty windfall is to pay off high-interest debt such as credit cards.
“The first consideration should be to reduce high-interest rate debt,” says Mike Hunsberger, a Certified Financial Planner and owner of Next Mission Financial Planning in Saint Charles, Missouri. “After that, I’d suggest they determine if they’re on track for their retirement. If they’re not, this extra money could be devoted to that.”
5. Max out retirement savings plans. A windfall can be used to boost retirement savings.
“To grow this pot of money and pay less taxes, max out your 401(k) contributions. If you’re 50 and up, you can put in as much as $30,500 for 2024,” says Alvin Carlos, a certified financial planner and managing partner at District Capital Management in Washington, D.C. “If you’re still working, max out your Roth or research the backdoor Roth. This is a great way to grow your wealth tax-free.”
6. Re-evaluate retirement plans. How big is your windfall? Will you be able to retire earlier than you expected? It is a good place to be.
“Can you retire a few years earlier? Can you stop saving for retirement and spend more on vacations, assuming you have enough assets?” says Justin Pritchard, a Certified Financial Planner at Approach Financial Planning in Montrose, Colorado. “Perhaps you can work less or change to a different job, given your new circumstances.”
7. Keep some liquid savings. Set aside some of your newfound wealth in a checking, money market or savings account, so you can tap it instantly if needed.
“Consider a high-yield savings account that gives at least 4% interest, or a money market that yields about 5%,” Carlos says.
Tuck away several months’ worth of living expenses into these accounts.
“Ensure you have a robust emergency fund in place, ideally covering six to 12 months of living expenses,” says Gene Thompson, a Certified Financial Planner and director of financial planning at Iconoclastic Capital Management in Rochester, New York. “This safety net can help you weather unexpected financial storms.”
8. Diversify your investments. Choose a mix of investments for your financial windfall.
“Resist the urge to invest all your money in a single stock or opportunity, even if it seems promising,” Thompson says. “Diversifying your investments can reduce risk and increase the potential for steady growth.”
If you are close to retirement, you’ll want to be more conservative with how you invest your money.
“As you approach retirement, your investment strategy should be more conservative to preserve capital while still allowing for some growth,” Thompson says. “Consider a mix of stocks, bonds and other assets that align with your risk tolerance and time horizon.”
9. Review your estate planning. A windfall may give you the opportunity to give more to your loved ones.
“Update your estate plan to reflect your new financial situation,” Thompson says. “This may include revising your will, setting up trusts, or designating beneficiaries for your accounts.”
Remember to prepare for your own longevity.
“Given increasing life expectancies, it’s crucial to ensure that your funds will last throughout your retirement,” Thompson says. “Consider long-term care insurance or setting aside money for future health care needs.”
10. Give to others. Share your windfall of wealth with family members.
“Pay it forward. You can make someone else’s year (dependents most obviously) by giving them a tax-free gift — $18,000 per recipient per giver in 2024 without any need to file any tax forms,” says Karen Ogden, a Certified Financial Planner and partner at Envest Asset Management in Ridgefield, Connecticut.
By giving now, you may be able to see how your loved one uses your financial gift. Donating to a favorite charity is another option.
“If you have children, loved ones or causes that you’d like to contribute to, perhaps now is the time,” Pritchard says. “You can enjoy the satisfaction of giving while you’re still alive, and you might be able to see the impact of your gift.”