On a regular basis, situations arise where my clients are faced with the “new” responsibility of making investment decisions. This can happen for many different reasons, including money that has been inherited; a 401(k) rollover; exercised stock options; proceeds from a lawsuit; and even winnings from a lottery. A surviving spouse also faces this challenge when faced with the new responsibility of making the financial decisions. Although the reasons may vary for these situations, the impact on a person is typically the same: a great deal of anxiety. A person goes from not having any major financial decisions other than maybe the monthly bills to the overwhelming burden of caring for the new financial responsibility.
The Moment of Arrival
Possible life-altering financial decisions need to be made and the reaction to this new responsibility is not much different than the feelings and emotions parents experience with their first newborn: “I don’t want to make a mistake.” Both situations can cause loss of sleep, irritability, anxiety, indecision, and an overall sense of confusion.
Parents typically have the advantage of knowing this new “burden” is coming and have time to prepare as do clients in most situations. In both cases, the moment of “arrival” can be overwhelming. Some cases can be particularly emotional and challenging, such as when the beneficiaries of an inheritance are not aware of the inherited amount or a spouse dies suddenly. Identify priorities even when it is known ahead of time, this can be somewhat intimidating for a person who has not managed large lump sums of money previously or made major financial decisions. I have seen emotions run the full spectrum in these situations: giddiness, bewilderment, crying, hyperventilation, and denial. All of these emotions are completely normal. The important thing to do in these situations is to take a step back and identify your priorities and determine what is your biggest fear concerning the money? Again, peoples’ biggest fear in these situations is: “I don’t want to make a mistake.” Because this often is the primary thought, they tend to avoid making decisions and can sometimes become paralyzed when faced with this new burden. Honestly, as long as taxes are paid in a timely manner, along with the monthly bills, this approach is acceptable for a while, providing it is not neglected for an extended period. Things to remember during the process that will help alleviate the new burden: Slow down: other than the payment of any taxes and monthly expenses, do not allow yourself, or others, to force deadlines upon you for decisions. The only decisions that must be made are ones that have legal deadlines. Most long-term financial decisions do not carry a sense of urgency. As with a newborn, crawl first before you start walking. Slow everything down. Identify possible tax ramifications: you may face tax ramifications with your decisions. This includes potential estate and income taxes, including distributions from retirement plans, annuities, trusts, and other asset sales that may create a taxable event. Gather all relevant information before taking any distributions or selling any assets.
Analyze your current financial situation: evaluate your debts and monthly cash flow needs. Take inventory of your: 1) checking account; 2) “rainy day emergency account”; and 3) investment/ retirement accounts. Become familiar with your monthly expenses, income and overall budget. Understand the implications when selling an asset or spending money. Where did the money come from? Was it investment income, principal, paycheck or pension? Get comfortable: the eventual goal in any financial situation is to become comfortable and not allow the new burden of responsibility to control your emotions and day-to-day life. If the situation allows you to do so in advance, educate yourself on your options. Interview professionals in the legal, investment and tax area. Make a list of questions and concerns and share it with your advisors. Create a plan by identifying your income needs, return and risk expectations, and a “wish list” of things you would like to do in the future. What are your priorities?
Take the next step: implement your plan at your own pace. Ask for help and guidance and don’t attempt to make all the decisions at once. Missing an opportunity is more prudent than wishing you could retract a long-term financial decision. Does the new financial situation allow you to do some things you have always considered, but never been able to do? Possibilities include funding a retirement account, taking a trip with your family, running your own business, and countless others. These are all investments, but their purpose varies as does the type of return. Matching your priorities along with realistic expectations will lessen the overall burden of any new financial situation. The goal is to manage your new financial situation in a way that allows it become an ally and positive resource…not a burden.