Research firm, Strategic Insight, has projected that over the decade from 2016 to 2026, a total of $1 trillion in personal wealth will be transferred from one generation to another.1 Almost half of Canadian investors surveyed expect to receive some of that $1 trillion in the form of an inheritance.2 The question is, are people truly prepared to manage their newly found prosperity?
Sudden Wealth Syndrome (SWS) refers to the adjustment problems that people can face when they come into money abruptly or unexpectedly. Whether acquired through an inheritance, an unexpected windfall or perhaps because you’ve lost your spouse who always looked after the finances, sudden wealth can feel overwhelming. Ironically, gaining wealth too fast can hurt your finances in the long run if you don’t know how to manage it wisely.
How do you protect yourself so that your money lasts a lifetime – and even beyond? As a Financial Advisor, I can play a crucial role in not only providing investment advice, but also stopping you from making poor decisions about your finances.
Financial planning
We can develop a comprehensive financial plan based on the type of life you envision, which may include supporting children or other loved ones, legacy considerations or the charities you hope to impact.
A proper financial plan will also help you determine the income level you need to be comfortable and how much you can afford to spend each year so your money will last. After all, having a lot of money with no plan is a recipe for having no money.
Sticking to a rational budget
It’s important to take time out to assess and get used to your new wealth. This includes holding off on big expenditures until you’re comfortable with your financial position. A “no decisions” cool off period allows you to take time to consider your options and meet with me to set out a plan for managing your finances and balancing your spending priorities.
For example, you could set a spending limit of between 5% and 10% of the total after-tax funds you’ve received so you can splurge if you need to. Because few people have an iron will, this allows you to sensibly have some fun without jeopardizing longer-term goals.
Understanding the tax implications of your asset picture
Taxes are an especially important consideration if your wealth is in an asset that’s subject to tax before the money can be spent, like stock options or registered savings plans. We can see whether your windfall is considered income and the effects that may have on your yearly tax bill.
Looking ahead, updating your will and estate plan may be necessary to manage potential legal and tax consequences for your estate and heirs. It may be uncomfortable to think about, but it’s well worth the effort, and there can be significant consequences for waiting until it’s too late.
Ultimately, being tax efficient keeps more of your money in your pocket to use for building a stronger financial future. That’s where your focus should be.
Managing friends and family requests
Another area you may need help with is the delicate task of dealing with friends and family who may ask you for money. Refusing to lend money to loved ones can be awkward. It’s a lot easier with an out, when you can say: “I can’t make any loans without first checking in with my Advisor.” I can act as a buffer between you and the people in your life who may be looking for handouts.
Even if you’re prepared to provide financial support to others, don’t promise anything or make commitments before understanding your overall financial picture and whether you can realistically follow through.
Solutions for SWS
While coming into money can be an enormous boon, it brings many responsibilities that you may not be ready for. If you’ve experienced a sudden windfall, I can guide you through making the most of your good fortune.
Learn more about the wide range of wealth management support available to you by contacting our office today.
1. “2015 Household Balance Sheet,” Investor Economics, 2015.
2. “Retirement, death and taxes,” Natixis Global Asset Management, 2015.