Managing a windfall (like a bonus or inheritance)

Make sure you put your new bonus or inheritance to its best use.

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Tips and to-dos from money guru Jean Chatzky

The Center on Wealth and Philanthropy at Boston College estimates that $36 trillion will be inherited from 2007 and 2061—the largest transfer of wealth in history.1 Many people come into large sums of money every year through bonus pools or stock options. A lucky few even win the lottery. And yet, the National Endowment for Financial Education estimates 70% of people who receive windfalls blow the entire sum within a few years. Don't like the sound of that? Follow these steps instead:

First, do no harm:

The Hippocratic Oath actually works quite well here. Don't quit your day job. Make no promises. And give yourself a good six months to a year before you make even your first financial move. You need to think, hard, about what you want this money to do for you and others in your life. So, consider parking the money somewhere safe—a money market account, for example—where you won't use it or lose it.

Allow a little splurge:

If you're feeling the need to splurge in some small way—particularly if you earned this windfall—give into it. But make the splurge a small one (no more than 5% of whatever you've received). Then guarantee you'll keep your hands off the rest by putting it into an account where you won't see it on a daily basis.

Rally your advisors:

You'll want to get advice about the best way to handle this financial opportunity from a financial advisor (who can help you map out a strategy to use the money to do what you want it to do), an accountant (who can help you consider the tax consequences), and, perhaps, a therapist. Large sums of money have the potential to be life- and relationship-altering, and not always in a good way. And if the money came through an inheritance, that may raise other emotional issues better dealt with sooner rather than later.

Firm up your financial base:

One thing to consider is using some of this money to build a truly strong financial foundation. That means eliminating high-interest-rate credit card debt, fleshing out your emergency cushion so that it could get you through three to six months of unemployment, increasing your retirement plan assets so that you're on track to have saved 1x your salary by age 30, 3× by age 40, 6× by age 50, 8× by age 60 and 10× by 67.2 (Paying off student loans or mortgages are frequent wish-list items, but because of their relatively low interest rates, you may get a better return by investing your money.)

Think bigger:

Then turn to your long-term picture. What do you want this money to do for you and the people and causes you care about? Is this the money that will put your children through school debt-free, enable you to transition to a new career, make a gift to an organization your parent (or whoever left you the money) might value, or buy a second home where your children and grandchildren can gather for years to come? The key is to plan it out—with help from your team—so that you can see roadblocks before you run into them.

Put your money to work:

Your goals will dictate your investment strategy. Money you need in the next three years shouldn't be subject to market risk. As your goals get further away, you can take more risk with the funds. But remember that this is money with emotion attached. Ask yourself: How would I feel if the value of my portfolio dipped 20 or 30 percent in the short term? If the answer is, "unable to sleep," dial back your risk until it matches your risk tolerance.

Consider giving some away:

Research has shown that one way to increase the amount of happiness you get from your money is to give it to causes you believe in. Consider opening a donor-advised fund or a giving account. You make your donation to the fund (moving money out of your estate) and take a tax deduction in real time. The money is invested for growth. Then, when you're ready, you direct the money to be given to the charity of your choice.

Adjust your own estate plans:

Finally, you'll want to add another member to the team—an estate planning attorney for you (and your spouse if you have one). Should something happen to you, it's important to be sure that your heirs and your charities are similarly taken care of by keeping your will, durable powers of attorney for health care and finance, living will, and any trusts up to date.

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Investing involves risk, including risk of loss.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
1. The Center on Wealth and Philanthropy, Boston College, A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy, May 28, 2014.
2. The 10× savings rules of thumb are developed assuming age-based asset allocations consistent with the equity glide path of a typical target date retirement fund, a 15% savings rate, a 1.5% constant real wage growth, a retirement age of 67, and a planning age through 92. The replacement annual income target is defined as 45% of preretirement annual income and assumes no pension income. This target is based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stat, IRS 2014 tax brackets, and Social Security Benefit Calculators. Fidelity developed the salary multipliers through multiple market simulations based on historical market data, assuming poor market conditions to support a 90% confidence level of success. These simulations take into account the volatility that a typical target date asset allocation might experience under different market conditions. Volatility of the stocks, bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign) are represented by Ibbotson Associates SBBI S&P 500 Total Return Index, bonds are represented by Ibbotson Associates SBBI U.S. Intermediate Term Government Bonds Total Return Index, and short-term assets are represented by Ibbotson Associates SBBI 30-day U.S. Treasury Bills Total Return Index, respectively. It is not possible to invest directly in an index. All indexes include reinvestment of dividends and interest income. All calculations are purely hypothetical and a suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any particular investment or take into consideration the composition of a participant's particular account. The salary multiplier is intended only to be one source of information that may help you assess your retirement income needs. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns also will generally be reduced by taxes.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments.
Jean Chatzky is not employed by Fidelity but may receive compensation from Fidelity for her services.

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