Rushing decisions before there’s time to adjust to the new reality is a no-no, expert says
Published May 12, 2023 • Last updated 6 days ago • 4 minute read
A large financial windfall comes with many questions, mixed feelings and stress. Photo by Getty Images/iStockphoto By Julie Cazzin with Janet Gray
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. Q: I have relatives that recently won a $4.7-million lottery prize and they’re now looking at what to do with all this newfound wealth. The couple is in their late 50s and both now want to retire. They have little in savings, but always pay their mortgage and household expenses. They have three grown children as well as a pair of twin granddaughters they would like to financially help. Their bank has recommended they work with an adviser. What investment advice would be helpful for them? They have some consumer debt, with a car loan, mortgage and home equity line of credit (HELOC) that total $400,000. And how should they decide how much to give their children and grandchildren, and when? — Thanks, Erminia D.
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FP Answers: Erminia, it’s good advice from their banker to work with an adviser to explore their best options. A large financial windfall comes with many questions and perhaps mixed feelings and additional stress over impending decisions. A good rule is to not rush to make any decisions until there has been time to adjust to their new reality and to research/discuss/clarify both their new goals and possibilities.
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Article content Start by looking at what they want to accomplish in the future — purchases, gifts, travel, etc. Make sure to attach a dollar amount to these goals so they know where and when they might spend the winnings.
I have no doubt they could retire now, but, as always, it’s not how much you have, but how much you spend that is the key number to look at when determining financial stability. Once their goals are determined, review their current lifestyle costs to see what is needed in expenditures to pay for their basic needs (food, shelter, taxes) and wants (travel, gifts, charitable donations).
Then, they should carve up the large amount into smaller amounts, with the largest being the amount needed to invest to provide future income, as well as for occasional and maybe less frequent purchases such as a new car, extra travel or large gifts. Ensure that the income segment of the winnings is solidified before looking to give to others.
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Article content Keep in mind that the average 58-year-old Canadian woman is expected to live to be 87, while men will live to be 84. But you also need to plan for the 25-per-cent chance that women could live to age 94 (men to age 92), or the slimmer 10-per-cent chance that women will live to age 98 (men to age 97). A good retirement planner can help them with these scenarios.
I suggest your relatives first pay off their outstanding debts, which include the car loan, mortgage and HELOC. But be sure to ask what the penalties might be for early repayment so there are no surprises. Once those payments have ended, their lifestyle expenses will decrease and should allow them to allocate their lottery winnings with more confidence.
In retirement, they may also have income from Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, so the income your relatives will need now in their late 50s from their savings and investments might change when these other sources of income start. Any financial plan they put in place needs to be monitored, updated regularly and appropriately changed as they go.
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Article content The couple should also look at maximizing each of their tax-free savings accounts (TFSAs) and clarify with an adviser if registered retirement savings plans (RRSPs) are a good option for them.
Short-term goals indicate that cash in a savings account is needed for spending in the near future (under 12 months), funds for medium-term goals in the one-to-five-year time frame should be in guaranteed income certificates (GICs) or other fixed-income products, and funds for long-term goals of five years or longer should be invested in a higher percentage of stock/equity products such as mutual funds, exchange-traded funds or individual stocks. Again, an adviser can help you make these decisions.
Purchasing a lifetime annuity for a guaranteed source of retirement income may make sense for them. An annuity provides a guaranteed stream of income for life, usually for retirees. Buying an annuity with some of your relatives’ winnings protects them against themselves (such as when they make hefty and impulsive spends) as well as others who may take advantage of them.
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Article content Annuities can be purchased from insurance firms or brokerage companies, and they all have fees and commissions, which are often built into the price. Get several quotes when buying an annuity to help your relatives (along with an adviser) make the best choice.
If your relatives would like to share some of their lottery winnings with family, they could look into helping their children with their mortgages, or contributing to registered education savings plans (RESPs) for the grandkids.
What should an investor do if they own a lot of shares in one company? Can I retire this year given the recent downturn in markets? Do unconscious biases affect investment returns? I like the idea of giving a hand up rather than a handout. A hand up helps people reduce their current burdens and move forward. A handout can sometimes enable people to continue their previous poor habits, so they often arrive back where they started.
Janet Gray is an advice-only certified financial planner with Money Coaches Canada in Ottawa.
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