Trusted advisers can help protect the ‘Instantly Wealthy’

According to the National Endowment for Financial Education, up to 70 percent of people who come into sudden money, whether from a lottery or, more often, from an inheritance, insurance settlement, pension payout or the like, will deplete those funds within just a few years.

Sports Illustrated noted in a 2009 article that 78 percent of former NFL players had gone bankrupt within two years of their retirement, while roughly 60 percent of former NBA players were broke within five years of their final game. What's going on?

The theory used to be that receiving a large chunk of cash "ruined people," and drove them to make bad decisions. But research shows otherwise. Don McNay is a financial adviser and national expert on the habits of lottery winners. He says, "The problem is wealth. Once people have it, their bad patterns only get worse." So, receiving a windfall doesn't necessarily change a person, but it does amplify their money habits.

I've seen many people, who I will call the "Instantly Wealthy," struggle with this situation. The widow whose husband had large life insurance policies feels the need to give the money to her children. The young person who receives a disability settlement and wants to open a business he is completely unfamiliar with. The pre-retiree who is going to receive a large lump-sum pension but doesn't believe he will live much longer, so wants to spend it all now.

In each case, they are reacting emotionally to a large sum of money. It's foreign to them, even if they knew years ahead that they would receive it. I do my best to help people look at the big picture, and in many cases ask them to delay making any decision right away. That is usually a good first step.

The next problem is that once other people find out that this money exists, the Instantly Wealthy will receive a lot of advice. They will be told over and over to pay their house off, or to do this, or to do that. If they come to see me, and they are considering paying off their home, the first question I ask is whether they plan to live there for a long time. It could be that this windfall opens other doors, such as the ability to move closer to family. If that is a possibility, I typically advise against paying the house off.

Paying off other debt, however, usually makes a lot of sense. This is where a person needs to talk to a trusted adviser, who will help them make the right decisions. This person might be a Certified Financial Planner professional, an attorney, a Certified Public Accountant, or all three as a team.

The third problem these people will face are salespeople. They will come from every direction and can be really overwhelming. The first response I would suggest is, "My financial adviser and I have agreed that I will wait a year before making any decisions with this money." This puts the Instantly Wealthy back in the control seat. And, if the product is something that looks interesting, they can take the materials to one of their trusted advisers to review. The bottom line is that getting professional help can help protect the windfall for the future.

This story was originally published April 26, 2016 at 6:00 PM with the headline "Trusted advisers can help protect the ‘Instantly Wealthy’."