Making the most of a financial windfall

Who hasn’t dreamt about receiving a financial windfall? Waking up one morning to find you’ve won the lotto, or receiving an inheritance from a distant relative? Those daydream moments are certainly nice to fantasize about, but there are also more common windfalls that come at a price… such as redundancy or losing a parent or partner.

Unfortunately, many people who receive a financial lump sum end up wasting it through mismanagement and lack of planning. But if you happen to find yourself with a significant amount of money arriving unexpectedly, then it can be an excellent opportunity to create additional financial security.

We look at how to make the most of your windfall, and Financial Adviser Brendan Smith highlights some of the considerations you need to think about before making any specific decisions.

When you receive a large boost to your bank balance, you might feel the urge to start spending straight away… but it’s best to take a deep breath before you do anything. Especially if the funds have come from a redundancy package or the estate of a loved one. You need to take some time to process what you’ve been through, and in moments of heightened emotions it is easy to make poor decisions.

You didn’t have the money yesterday, so waiting a few weeks before you action anything isn’t going to be detrimental, and it gives you a chance to speak with your financial adviser. Seeking professional advice is the first step to ensuring you make the most of the funds.

When you talk with your adviser and formulate a clear plan, you can also discuss with them whether you want to splurge a bit.

If the money has come from redundancy, perhaps you would like to buy yourself a selection of new outfits for future interviews. Or if you’ve received an inheritance, you might want to take a short holiday to your favourite family destination to celebrate life.

Your adviser will be able to give you insight into how much you could spend without dramatically impacting your overall plan.

There are many different ways in which you could choose to use your financial windfall. And again, this is where your financial adviser can help. For some, the idea of paying off the mortgage and other debt is front of mind, because it can help reduce stress and allow you to feel financially free. But if the debts are low interest and are part of your regular budget, then paying them off completely might not be the wisest choice. There could be other more financially beneficial options.

Depending on your age, you could consider boosting your superannuation. You could make non-concessional contributions of up to $300,000 in any three-year period, or concessional (tax-deductible) contributions of up to $25,000 per year. This could be a great option if you are already getting close to retirement age, as it could considerably improve your overall position when you are ready to retire.

Alternatively, you might consider creating an investment portfolio – or expanding an existing one. This could be an appropriate choice if you have already retired and are unable to add to your super. Brendan explains how one of our clients received an unexpected windfall and was able to put it to good use:

“Our retired client was receiving a partial pension from her super as well as pension payments from Centrelink… she was living comfortably and happy in her position.

She received a phone call from the UK saying that she had inherited money and they needed her bank details to deposit the funds. Initially, it seemed as though it was a typical scam, but after deeper investigation, it turned out to be legitimate. Estate laws in the UK are different to here in Australia, and if someone passes away without a will, the estate is divided amongst all living relatives – no matter where they are. And in this instance, she was going to inherit around $120,000.

When we first spoke, her main concern was losing her Centrelink entitlements. With such an amount being received, it was inevitable that it would impact her pension, but we approached the situation looking at how best to use the funds.

In the end, we invested it and managed to replace the regular Centrelink income that she lost. On a monthly outcome from a cashflow point of view she was no different, but we also set up the portfolio so that it can pay her a $15,000 lump sum every year for the next seven years. This enables her to have a holiday every year and essentially spend her inheritance that way.

After those years the money will be gone, but she will have had wonderful holidays during that time. Essentially, we set it up like a holiday fund… then as the lump sums are withdrawn, her eligibility for the Aged Pension will increase… so we can decrease the amount that is paid regularly to supplement the pension.”

Brendan says that one of the most commonly asked questions is, “Will this money affect my Age Pension?” and the answer is most likely, “Yes”. But that doesn’t mean you will be negatively impacted. Depending on the amount of the lump sum, there should be solutions that offset the financial reduction in any Centrelink payments, but as we’ve illustrated, they can be highly complex, and this is why it is crucial you speak with your adviser before implementing any changes. Brendan continues,

“As part of our strategy, we selected investments that would deliver the appropriate income, rather than focus on growth. Because if they grow and you are selling down $15,000 a year, you might end up in a position where you have some taxable income… which we didn’t want. We’ve definitely achieved the best outcome in this instance.”

Here at First Financial, we are able to offer strategic advice that will benefit you long into the future. And we always focus on the long-term! When you receive a financial windfall, we want you to feel confident in your decisions about how to use it.

If you’d like to discuss your personal situation with one of our friendly team, please contact us today.