Today, I’d like to CONCLUDE our video series on How To Manage A Financial Windfall.
…and the next consideration is in regards to people who are Approaching Retirement: Folks who are retired or who will be retiring shortly need to be the most careful with their investment strategy on a new inflow of assets. Investing a large sum of money right before you stop working and then experiencing a major market downturn can be devastating. This “sequence of returns risk,” or the risk of experiencing a string of unfavorable returns as you begin to draw down on your portfolio, is a very difficult scenario from which to recover.
A good example of this was during the 2008-2009 Great Financial Crisis. Some soon-to-be retirees had their 401(k) invested much too aggressively or too concentrated in their own company stock. The market downturn and fragility of the financial system was devastating. Instead of retiring as planned, some of these people got wiped out by the market crash and were forced to remain working for much longer.
One way to invest that manages for sequence of returns risk is to set up a “bond tent.” This strategy keeps a few years’ worth of expense money in very short-term high-quality bonds or cash. The remaining assets can be invested in the market, perhaps more aggressively, according to the individual’s various other goals. Should the market have several years of subpar returns, the investor won’t have to liquidate their more volatile holdings, like stocks, at a steep loss. Rather, they will be able to use their cash cushion or high-quality bonds to meet their expenses as they wait for the market to recover.
Next consideration is whether to Keep for Yourself vs. Give to Others: The desire to give is imbedded in most Jews, with tzedakah and helping out children part of the genetic makeup. The question is how much of this windfall should be used for your own benefit and how much should be given to help lift up others.
If the funds came from an inheritance, sale of a business, sale of real estate, or a bonus, then I’d recommend giving 10% of the net proceeds to tzedakah immediately. It’s a mitzvah and a core part of our being. However, funds that came from a 401(k) rollover into a new plan or into your IRA should not be taken out before a certain age to avoid being subject to unnecessary taxes and penalties. Since 401(k) funds were already part of your assets, and not a new source of income, no additional maaser needs to be taken from them.
As for helping family remembers, remember the concept of “pay yourself first.” This simply refers to the fact that failure to make yourself a priority, in this regard, can lead to challenging financial consequences in the future. Once you have taken the steps to ensure your own financial well-being, it is up to you how much you want to give your children to assist them in their own finances.
And finally, Don’t Do Nothing: Indecision has a price. Don’t sit paralyzed in cash while contemplating your next move. That paralysis will have the negative consequences of losing buying power with inflation and missing out on compound interest. It may lead to other unfavorable ramifications of not taking a proactive approach to your finances. Remember, if your financial windfall was tied to a business or to real estate, there was already risk associated with this capital. The fact that the proceeds can now be diversified among a variety of different asset classes is a wonderful opportunity that should be seized.
Receiving a large windfall is a blessing, but the stresses associated with how to manage these funds properly can feel overwhelming. Take the opportunity to touch base with your tax, legal, and financial advisors to get their advice on your updated financial situation. It’s also a good time to revisit your overall strategy and possibly update your Investment Policy Statement. Speaking to your trusted advisors to develop a sensible approach can remove the decision-making stress and ensure that your funds are a source of comfort and simcha for you and your family.