I'M Rich! - Now What?

Kiplinger's Personal Finance Magazine, Nov, 2000 by Kristin Davis

Even financial professionals need help managing a windfall, says Bradley, because sudden wealth is different from wealth you accumulate over a lifetime. You may find yourself in uncharted tax territory, or with an instant estate that will need to be distributed. And a third-party adviser can also be a foil to whom you refer Cousin Joe when he hits you up for seed money to start an emu ranch.

The ideal adviser has at least five years' experience, has worked with other windfall recipients (and will give you references), and has no disciplinary history with state or federal regulators. He or she should also be someone with whom you feel at ease, so go ahead and interview several candidates. (Get referrals from the Financial Planning Association, 800-282-7526 or www.fpanet.org; or from the National Association of Personal Financial Advisors, 888-333-6659 or www.napfa.org. A good book is The Right Way to Hire Financial Help, by Charles Jaffee; MIT Press, $25.)

A textbook case

WHEN DEAN and Nancy Chisholm discovered that they held the winning numbers for a $10-million Texas lottery jackpot, their 11-year-old son rushed off to tell his l0-year-old sister, who was watching TV.

"We won $10 million!" said big brother.

"Get out of the way," demanded little sister. "I'm watching Who Wants to Be a Millionaire?"

In the end, like Regis's winning contestants, they ended up not-quite millionaires. The Chisholms (a pseudonym; the family asked us to withhold their real names) soon learned that they would split the $10-million jackpot with three other winners, slicing the prize to $2.5 million. They took their share in a lump sum, reducing the payout to $1.24 million. After taxes, they'll keep about $750,000.

Yes, they splurged a little: on a new Lincoln Navigator for themselves, a new truck for Dean's parents and some cash gifts to Nancy's family. But they also set aside $25,000 in a rainy-day fund and $25,000 to buy some land. With about $100,000 they paid off their mortgage, which lets them enjoy a little extra cash flow each month.

And then they got serious about their long-term goals: paying for their kids' college degrees and maintaining their standard of living through retirement. For each of their children, they aim to pay half the cost of attending a public college, which meant investing about $50,000.

Left to grow for about 20 years, the remaining $450,000--added to about $250,000 in savings they had already built up--should be plenty to maintain a $70,000-a-year lifestyle (adjusted for inflation) in retirement. "Dean has a pension, and they pay into social security," says McDonald, the Chisholms' financial planner. Neither Dean nor Nancy plans to quit working, he as a computer programmer and she as a school-library aide.

With perhaps a few minor deviations (some advisers would recommend against paying off the mortgage), the Chisholms' experience is a textbook case of how to manage a windfall. Bradley asks her clients to come up with a "bliss list" of personal and financial goals. Next, she puts a present value on each of the goals to see whether the money will cover them all. If not, she helps her clients set priorities. The whole exercise "may take a day or a year," says Bradley.